##### 

FORM 10-K



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

|                   |  |                                                                                                                                                     
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2005
    OR 
|[ ]                |  | TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from           to

0-17506


UST Inc.




|                                                                                                                                       |  |                                                                                                
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------
|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 12(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                                                                   









S-K 10-K 10-K.


12b-2




|                            |                       |                           | 
|--------------------------- | --------------------- | ------------------------- | 
|Large accelerated filer [X] | Accelerated filer [ ] | Non-accelerated filer [ ] | 

12b-2






DOCUMENTS INCORPORATED BY REFERENCE














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FORM 10-K

TABLE OF CONTENTS

|           |  |                                                                                                                      |    |      |    |  |  | 
|---------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|           |  |                                                                                                                      |    | Page |   
|           |  |                                                                                                                      |    |      |   
|PART I    
|Item 1.    |  | Business                                                                                                             |    |      | 3  | 
|Item 1A.   |  | Risk
    Factors                                                                                                     |    |      | 7  | 
|Item 1B.   |  | Unresolved
    Staff Comments                                                                                        |    |      | 11 | 
|Item 2.    |  | Properties                                                                                                           |    |      | 11 | 
|Item 3.    |  | Legal
    Proceedings                                                                                                |    |      | 11 | 
|Item 4.    |  | Submission of
    Matters to a Vote of Security Holders                                                              |    |      | 13 | 
|PART II   
|Item 5.    |  | Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities |    |      | 14 | 
|Item 6.    |  | Selected
    Financial Data                                                                                          |    |      | 15 | 
|Item 7.    |  | Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                        |    |      | 16 | 
|Item 7A.   |  | Quantitative
    and Qualitative Disclosures about Market Risk                                                       |    |      | 33 | 
|Item 8.    |  | Financial
    Statements and Supplementary Data                                                                      |    |      | 35 | 
|Item 9.    |  | Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure                         |    |      | 69 | 
|Item 9A.   |  | Controls and
    Procedures                                                                                          |    |      | 69 | 
|Item 9B.   |  | Other
    Information                                                                                                |    |      | 70 | 
|PART III  
|Item 10.   |  | Directors and
    Executive Officers of the Registrant                                                               |    |      | 70 | 
|Item 11.   |  | Executive
    Compensation                                                                                           |    |      | 71 | 
|Item 12.   |  | Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters               |    |      | 71 | 
|Item 13.   |  | Certain
    Relationships and Related Transactions                                                                   |    |      | 72 | 
|Item 14.   |  | Principal
    Accountant Fees and Services                                                                           |    |      | 72 | 
|PART IV   
|Item 15.   |  | Exhibits and
    Financial Statement Schedules                                                                       |    |      | 73 | 
|Signatures |  |                                                                                                                      | 76 |     





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



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

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

Operating Segment Data

The Company hereby incorporates by reference the consolidated
Segment Information pertaining to the years 2003 through 2005
set forth herein on pages 62-63.





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SMOKELESS TOBACCO PRODUCTS

Principal Products

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

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







inter alia,








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products. On March 21, 2000, the United States Supreme
Court ruled that the FDA lacks jurisdiction to regulate tobacco
products. Following this ruling, proposals for federal
legislation for comprehensive regulation of tobacco products
have been considered. Similar proposals will likely be
considered in the future.

Over the years, various state and local governments have
continued to regulate tobacco products, including, among other
things, the imposition of significantly higher taxes, increases
in the minimum age to purchase tobacco products, sampling and
advertising bans or restrictions, ingredient and constituent
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 the future, including, among other
things, restrictions on the use of flavorings. The Company is
unable to assess the future effects these various actions may
have on its smokeless tobacco business. The Company believes
that any proposals for additional regulation at the federal,
state or local level should recognize the distinct differences
between smokeless tobacco products and cigarettes.

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

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

Raw Materials

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

The Company purchased all of its leaf tobacco from domestic
suppliers in 2005, as it has for the last several years. Various
factors, including the level of domestic tobacco production, can
affect the amount of tobacco purchased by the Company from
domestic sources. Tobaccos used in the manufacture of smokeless
tobacco products are processed and aged by the Company for a
period of two to three years prior to their use.

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

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

In addition, with the enactment of the Tobacco Reform Act and
its repeal of federal tobacco price support and quota programs,
tobacco can be grown anywhere in the United States with no
volume limitations or price protection or guarantees. As a
result, the Tobacco Reform Act favorably impacted the
Companys cost of leaf





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tobacco purchases during the 2005 tobacco buying season. Grower
contracting for the 2006 tobacco buying season is not yet
complete; however, the Company believes that costs incurred for
leaf tobacco purchases will approximate those incurred in 2005.

Working Capital

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

Customers

The Company markets its moist smokeless tobacco products
throughout the United States principally to wholesalers and
retail chain stores. Approximately 32 percent of the
Companys gross sales of tobacco products are made to four
customers, one of which, McLane Co. Inc., a national
distributor, accounts for approximately 15 percent of the
Companys consolidated revenue. The Company has maintained
satisfactory relationships with its customers over the years and
expects that such relationships will continue.

Competitive Conditions

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

Wine

The Company is an established producer of premium varietal and
blended wines. CHATEAU STE. MICHELLE and COLUMBIA CREST varietal
table wines and DOMAINE STE. MICHELLE sparkling wine are
produced by the Company in the state of Washington and marketed
and distributed throughout the United States. The Company also
produces and markets two California premium wines under the
labels of VILLA MT. EDEN and CONN CREEK. Approximately
48 percent of the Companys wine segment gross sales
are made to two distributors, neither of which accounts for more
than approximately 32 percent of total wine segment gross
sales. Substantially all wines are sold through state-licensed
distributors with whom the Company maintains satisfactory
relationships.

It has been claimed that the use of alcohol beverages may be
harmful to health. In 1988, federal legislation was enacted
regulating alcohol beverages by requiring health warning notices
on alcohol beverages. Still wines containing not more than
14 percent alcohol by volume, such as the majority of the
Companys wines, are subject to a federal excise tax of
$1.07 per gallon for manufacturers, such as the Company,
that produce more than 250,000 gallons a year. In recent years,
proposals have been made at the federal level for additional
regulation of alcoholic beverages, including, but not limited
to, increases in excise tax rates, modification of the required
health warning notices and further regulation of advertising,
labeling and packaging. Substantially similar proposals will
likely be considered in 2006. Also in recent years, increased
regulation of alcohol beverages by various states included, but
was not limited to, the imposition of higher excise taxes and
advertising restrictions. Additional state and local legislative
and regulatory actions affecting the marketing of alcohol
beverages will likely be considered during 2006. The Company is
unable to assess the future effects these regulatory and other
actions may have on the sale of its wines.

The Company uses grapes harvested from its own vineyards, as
well as grapes purchased from independent growers located in
Washington and California and purchases bulk wine from other
sources. Total grape tonnage harvested and purchased in 2005 is
adequate to meet expected demand.





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The Companys principal competition comes from many larger,
well-established national and international companies, as well
as many smaller wine producers. The Companys principal
methods of competition include quality, price, consumer and
trade wine tastings, competitive wine judging and advertising.

ALL OTHER OPERATIONS

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

ADDITIONAL BUSINESS INFORMATION

Environmental Regulations

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

Number of Employees

The Companys average number of employees during 2005 was
5,111.

Trademarks and Patents

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

Seasonal Business

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

Backlog of Orders

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





Item 1A  Risk Factors

Set forth below is a description of certain risk factors which
the Company believes may be relevant to an understanding of the
Company and its businesses. Stockholders are cautioned that
these and other factors may affect future performance and cause
actual results to differ from those which may, from time to
time, be anticipated. See Cautionary Statement Regarding
Forward-Looking Information on page 32.




    Company product sales are subject to economic conditions
    and other factors beyond the Companys control.The Companys future results will be affected by the growth
in the smokeless tobacco and wine marketplaces and the demand
for the Companys smokeless tobacco and wine products.
Factors affecting demand for the Companys products
include, among other things, economic conditions and actions by
competitors, as well as the cost of the products to consumers
which, in turn, is affected, in part, by the Companys
costs in manufacturing such products and the excise taxes
payable. Many of these factors are beyond the control of the
Company which makes results of operations difficult to predict.





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
    The tobacco industry is subject to governmental regulation
    and other restrictions. In particular, restrictions on tobacco
    marketing and advertising limit the options available to the
    Company to market smokeless tobacco products.Advertising, promotion and brand building continue to play a key
role in the Companys business, with significant
expenditure on programs to support key brands and to develop new
products. As described above, in 1986, federal legislation was
enacted regulating smokeless tobacco products by, among other
things, requiring health warning notices on smokeless tobacco
packages and advertising and prohibiting the advertising of
smokeless tobacco products on any medium of electronic
communications subject to the jurisdiction of the Federal
Communications Commission. Since 1986, other proposals have been
made at both the federal and state level for additional
regulation of smokeless tobacco products. These proposals have
included, among other things, increased regulation of the
manufacturing and marketing of tobacco products by federal and
state agencies (including, without limitation, the
U.S. Food and Drug Administration), the requirement of
additional warning notices, a ban or further restriction on
advertising and promotion, ingredients and constituent
disclosure requirements, restrictions on the use of flavorings,
sampling bans or restrictions, increasing the minimum purchase
age and the disallowance of advertising and promotion expenses
as deductions under federal tax law. The regulatory environment
in which the Company operates can also be affected by general
social and political factors.

Proposals for comprehensive federal regulation of tobacco
products will continue to be considered. To date, the Company
has opposed such proposals because they fail to completely
recognize the distinct differences between smokeless tobacco and
cigarettes. However, the Company would consider supporting such
regulation 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 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; and3.
    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).In addition to increased regulatory restrictions, the Company is
subject to various marketing and advertising restrictions under
the Smokeless Tobacco Master Settlement Agreement (the
STMSA), which the Company entered into in 1998 with
the attorneys general of various states and
U.S. territories to resolve the remaining health care cost
reimbursement cases initiated by various attorneys general. The
Company is the only smokeless tobacco manufacturer to sign the
STMSA. See Item 1  Business 
Smokeless Tobacco Products  Principal Products.
The Company also receives from time to time inquiries from
various attorneys general relating to the STMSA and other state
regulations in connection with various aspects of the
Companys business. The Company is presently addressing
inquiries related to the sale of its flavored smokeless tobacco
products.

Present regulations and any further regulations, depending on
the nature of the regulations and their applicability to the
Company and its future plans, could have an adverse effect on
the Companys ability to advertise, promote and build its
brands and/or to promote and introduce new brands and products
and, as such, have an adverse effect on its results of
operations.




    The excise taxes on smokeless tobacco products could
    affect consumer preferences and have an adverse effect on the
    sale of the Companys products.Smokeless tobacco products are subject to significant federal
and state excise taxes, which may continue to increase over
time. Any increase in the level of federal excise taxes or the
enactment of new or increased state or local excise taxes would
have the effect of increasing the cost of smokeless tobacco
products to consumers





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and, as such, could affect the demand for, and consumption
levels of, smokeless tobacco products in general and premium
brands in particular. Furthermore, the current ad valoremmethod of taxation, which is utilized by most states, bases
the amount of taxes payable on a fixed percentage of the
wholesale price, as opposed to some states which tax premium and
price value brands equitably based on weight. Therefore, the
ad valorem method of taxation has the effect of
increasing the taxes payable on premium brands to a greater
degree than the taxes payable on price-value brands, which
further exacerbates the price gap between premium and
price-value brands. To the extent that any such actions
adversely affect the sale of the Companys products, such
actions could have an adverse effect on the Companys
results of operations and cash flows.




    The smokeless tobacco category is highly competitive and
    the Companys volumes and profitability may be adversely
    affected by continued consumer down-trading from premium brands
    to price-value brands or by potential new entrants into the
    marketplace.The Company faces significant competition in the smokeless
tobacco category. The Companys premium units sold has
declined in recent years and remains susceptible to further
decline. The Company recognizes the need to continue to grow the
smokeless category and to promote brand loyalty to ensure
continued growth in its results of operations.

In light of this, the Company has been implementing plans to
focus on the growth of the smokeless tobacco category by
building awareness and social acceptability of smokeless tobacco
products among adults and by promoting the convenience of
smokeless tobacco relative to cigarettes to attract new adult
consumers to the category. The Company has also been
implementing plans to stabilize premium-priced brand sales
volume through product innovation such as the introduction of
new products, building and strengthening premium brand loyalty
for premium brand consumers through various promotional programs
and price-focused initiatives to provide improved value in price
sensitive areas of the United States. However, while the Company
believes that it is pursuing the right course of action, the
Company cannot guarantee the success of these action plans. If
the Companys new business strategy is not successful,
total premium units may continue to decline and its results of
operations could be adversely affected.

Additionally, there is always the possibility, especially if
smokers continue to switch from cigarettes to smokeless tobacco
products, that other major tobacco companies with substantial
resources may test or enter the smokeless tobacco marketplace
and introduce new products that are designed to compete directly
with the Companys products. While there is the possibility
that such an action will have the effect of expanding the
smokeless tobacco category, which could be beneficial to the
Company, it is also possible that such action could be
detrimental since it may require the Company to expend
significant resources to maintain its premium unit volume. The
Company cannot, at this time, predict with any certainty what
effect, if any, such action would have on the Company and its
results of operations.




    The Company has ongoing payment obligations under the Fair
    and Equitable Tobacco Reform Act, the STMSA and other state
    settlement agreements.In 2005, the Company incurred expenses of approximately
$4.2 million, $14.8 million and $7.3 million,
respectively, under the Fair and Equitable Tobacco Reform Act of
2004 (the FETRA), the STMSA and other state
settlement agreements. The Company presently expects to continue
to incur expenses under FETRA, the STMSA and other related
settlement agreements. Based on information presently available
to the Company, the Company does not anticipate that any
increases in such expenses to be incurred in the future will
have a material adverse effect on the Company. However, the
amounts payable in the future cannot be predicted with certainty
and may increase based upon, among other things, the relative
share of the overall tobacco market held by smokeless tobacco
and the Companys share of the moist smokeless tobacco
marketplace. It is also possible that the amounts payable under
FETRA may be offset, in part, through reductions in the cost of
tobacco, which may result from the competitive setting of prices
expected to occur as a result of FETRA.




    Fluctuations in the price and availability of tobacco leaf
    could adversely affect the Companys results of
    operations.Tobacco is the most important raw material in the manufacture of
the Companys smokeless tobacco products. The Company is
not directly involved in the cultivation of tobacco leaf and is
dependent on third parties to produce tobacco and other raw
materials that it requires to manufacture its smokeless tobacco
products. As with other agricultural commodities, the price of
tobacco leaf tends to depend upon variations in weather





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conditions, growing conditions, local planting decisions,
overall market demands or other factors. The Companys
inability to purchase tobacco leaf of the desired quality from
U.S. suppliers on commercially reasonable terms, or an
interruption in the supply of these materials, in the absence of
readily available alternative sources, could have a negative
impact on the Companys business and its results of
operations.




    Fire, violent weather conditions and other disasters may
    adversely affect the Companys operations.A major fire, violent weather conditions or other disasters that
affect the Companys manufacturing facilities could have a
material adverse effect on the Companys operations.
Although the Company believes it has adequate amounts of
available insurance coverage and sound contingency plans for
these events, a prolonged interruption in the Companys
manufacturing operations could have a material adverse effect on
its ability to effectively operate its business.




    The Companys continuing ability to hire and retain
    qualified employees is important to the future success of the
    Company.The environment in which the Company operates, as a smokeless
tobacco company, presents challenges not faced by other consumer
products companies. Accordingly, the continuing ability to hire
and retain qualified employees who are capable of working in
this challenging environment is critical to the Companys
success.




    The Company is subject, from time to time, to smokeless
    tobacco and health litigation, which, if adversely determined,
    could subject the Company to substantial charges and
    liabilities.The Company is currently subject to various legal actions,
proceedings and claims arising out of the sale, use,
distribution, manufacture, development, advertising, marketing
and claimed health effects of its smokeless tobacco products.
See Item 3  Legal Proceedings. The
Company believes, and has been so advised by counsel handling
the respective 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 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. However, if
plaintiffs in these actions were to prevail, the effect of any
judgment or settlement could have a material adverse impact on
the Companys consolidated financial results in the
particular reporting period in which any such litigation is
resolved and, depending on the size of any such judgment or
settlement, a material adverse effect on the Companys
consolidated financial position. In addition, similar litigation
and claims relating to the Companys smokeless tobacco
products may continue to be filed against the Company in the
future. An increase in the number of pending claims, in addition
to the risks posed as to outcome, could increase the
Companys costs of litigating and administering product
liability claims.




    The Company could be subject to additional charges and
    liabilities as it seeks to resolve the remaining antitrust
    related lawsuits.In March of 2000, in an action (Conwood Litigation)
brought by one of the Companys competitors, Conwood
Company L.P., alleging violations of the antitrust laws, a
significant verdict was rendered against the Company. See
Item 3  Legal Proceedings. Following
the commencement of this lawsuit, actions were also brought on
behalf of direct and indirect purchasers of the Companys
products. While the Company has paid the verdict and settled the
actions brought on behalf of direct purchasers and many of the
actions brought on behalf of indirect purchasers, a number of
actions on behalf of indirect purchasers brought in a limited
number of states are still ongoing. The Company intends to
continue to pursue settlement of the remaining indirect
purchaser actions on terms substantially similar to the
settlements previously entered into by the Company in connection
with other indirect purchaser actions. As discussed in
Item 3  Legal Proceedings, the
Company believes that the ultimate outcome of these actions will
not have a material adverse effect on its consolidated financial
results or its consolidated financial position. However, if
plaintiffs were to prevail, beyond the amounts previously
accrued, the effect of any judgment or settlement could have a
material adverse impact on the Companys consolidated
financial results in the particular reporting period in which
such action is resolved and, depending on the size of any such
judgment or settlement, a material adverse effect on the
Companys consolidated financial position.





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
    The Companys wine business is subject to significant
    competition, including from many large, well-established
    national and international organizations.While the Company believes that it is well positioned to compete
based on the quality of its wines and the dedication of its
workforce, its overall success may be subject to the actions of
competitors in the wine category. Many of these competitors are
large, well-established national and international companies
with significant resources to support distribution and retail
sales. In addition, sales of the Companys wines can be
affected by the quality and quantity of imports.




    The Companys wine business may be adversely affected
    by its ability to grow and/or acquire enough high quality grapes
    for its wines, which could result in a supply shortage.
    Conversely, the Companys wine business may also be
    adversely impacted by grape and bulk wine oversupply.The adequacy of the Companys grape supply is influenced by
consumer demand for wine in relation to industry-wide production
levels. While the Company believes that it can grow and/or
otherwise secure from independent growers sufficient regular
supplies of high quality grapes, it cannot be certain that grape
supply shortages will not occur. A shortage in the supply of
wine grapes of appropriate quality could lead to an increase in
the Companys wine production costs. An increase in
production cost could lead to an increase in the Companys
wine prices, which may ultimately have a negative impact on its
sales.

In cases of significant grape and bulk wine oversupply in the
marketplace, the Companys ability to increase or even
sustain existing sales prices may be limited.





Item 1B  Unresolved Staff Comments

Not applicable.





Item 2  Properties

All of the principal properties in the Companys operations
were utilized only in connection with the Companys
business operations. The Company believes that the properties
described below at December 31, 2005 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 by the Company.

Smokeless Tobacco Products

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

Wine

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





Item 3  Legal Proceedings

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

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





11



---



##### 

Smokeless Tobacco Litigation

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

In Matthew Vassallo 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 action by
an individual plaintiff against various smokeless tobacco
manufacturers including the Company and certain other
organizations alleges personal injuries, including cancer, oral
lesions, leukoplakia, gum loss and other injuries allegedly
resulting from the use of defendants smokeless tobacco
products. Plaintiff also claims nicotine addiction
and seeks unspecified compensatory damages and certain equitable
and other relief, including, but not limited to, medical
monitoring.

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

In Kelly June Hill, Executrix and Fiduciary of the Estate of
Bobby Dean Hill, et al. v. U.S. Smokeless Tobacco
Company, Connecticut Superior Court, Judicial District of
Stamford (Docket
No. FST-X05-CV-05-4003788-S)
this action was brought by a plaintiff individually, as
Executrix and Fiduciary of the Estate of Bobby Dean Hill, and on
behalf of their minor children for injuries, including
squamous cell carcinoma of the tongue, allegedly
sustained by decedent as a result of his use of the
Companys smokeless tobacco products. The Complaint also
alleges addiction to smokeless tobacco. The
Complaint seeks compensatory and punitive damages in excess of
$15,000 and other relief.

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

Antitrust Litigation

The Company has entered into a settlement with indirect
purchasers in the states of Arizona, Florida, Hawaii, Iowa,
Maine, Michigan, Minnesota, Mississippi, Nevada, New Mexico,
North Carolina, North Dakota, South Dakota, Tennessee, Vermont
and West Virginia and in the District of Columbia
(Settlement). Pursuant to the Settlements, 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, on substantially similar terms, of other indirect
purchaser actions not covered by the agreement.

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





12



---



##### 

10K


The Company has also entered into a settlement to resolve the
Kansas class action and the New York action which has been
preliminarily approved by the court. (See
Form 10-Q for the
period ended September 30, 2005.)

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

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

Other Litigation

In People of the State of California, ex rel. Bill Lockyer,
Attorney General of the State of California v.
U.S. Smokeless Tobacco Company, Superior Court of
California, County of San Diego(Case
No. G1C851376), this action alleges that the Companys
sponsorship relating to the National Hot Rod Association
violates various provisions of the Smokeless Tobacco Master
Settlement Agreement (STMSA) and the related Consent
Decree entered in connection with the STMSA. The complaint seeks
declaratory and injunctive relief, unspecified monetary
sanctions, attorneys fees and costs, and a finding of
civil contempt.

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





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

Not applicable.





13



---



##### 

PART II







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

(a) The Companys Common Stock is listed on the New
York Stock Exchange (NYSE) and the Pacific Exchange,
Inc. under the symbol UST. As of January 31,
2006, there were approximately 7,239 stockholders of record of
the Companys Common Stock. The table below sets forth the
high and low sales prices of the Companys Common Stock, as
reported by the NYSE Composite Tape, and the cash dividends per
share declared and paid in each quarter during fiscal years 2005
and 2004. Currently, the Company expects to pay comparable cash
dividends in the future.

|               |  |      |       |      |      |   |       |           |      |   |      |  |  |     |       |  |           |   |       |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- | ---- | - | ----- | --------- | ---- | - | ---- |  |  | --- | ----- |  | --------- | - | ----- |  |  | - | ---- | 
|               |  | 2005 |       |      | 2004 |  
|               |  |      |       |      |      |  
|               |  |      |       | Cash |      |   |       |           | Cash |  
|               |  | High |       |      | Low  |   |       | Dividends |      |   | High |  |  | Low |       |  | Dividends |  
|               |  |      |       |      |      |  
|First Quarter  |  | $    | 56.90 |      |      | $ | 47.71 |           |      | $ | .55  |  |  | $   | 38.98 |  |           | $ | 34.00 |  |  | $ | .52  | 
|Second Quarter |  |      | 54.85 |      |      |   | 42.90 |           |      |   | .55  |  |  |     | 39.00 |  |           |   | 35.35 |  |  |   | .52  | 
|Third Quarter  |  |      | 47.62 |      |      |   | 39.81 |           |      |   | .55  |  |  |     | 40.71 |  |           |   | 35.66 |  |  |   | .52  | 
|Fourth Quarter |  |      | 42.50 |      |      |   | 37.59 |           |      |   | .55  |  |  |     | 48.97 |  |           |   | 39.56 |  |  |   | .52  | 
|               |  |      |       |      |      |   |       |           |      |   |      |  |  |     |       |  |           |  
|Year           |  | $    | 56.90 |      |      | $ | 37.59 |           |      | $ | 2.20 |  |  | $   | 48.97 |  |           | $ | 34.00 |  |  | $ | 2.08 | 
|               |  |      |       |      |      |   |       |           |      |   |      |  |  |     |       |  |           |  





|                      |  |           |           |          |  |              |       |             |  |  |           |  |  |  |            | 
|--------------------- |  | --------- | --------- | -------- |  | ------------ | ----- | ----------- |  |  | --------- |  |  |  | ---------- | 
|                      |  |           |           |          |  |              |       | Maximum    
|                      |  |           |           |          |  | Total        |       | Number of  
|                      |  |           |           |          |  | Number of    |       | Shares that
|                      |  |           |           |          |  | Shares       |       | May Yet Be 
|                      |  | Total     |           | Average  |  | Purchased as |       | Purchased  
|                      |  | Number    |           | Price    |  | Part of the  |       | Under the  
|                      |  | of Shares |           | Paid Per |  | Repurchase   |       | Repurchase 
|                      |  | Purchased |           | Share    |  | Programs(1)  |       | Programs(1)
|                      |  |          
|October 1  31, 2005  |  |           | 341,500   |          |  | $            | 39.90 |             |  |  | 341,500   |  |  |  | 18,118,647 | 
|November 1  30, 2005 |  |           | 448,400   |          |  | $            | 40.18 |             |  |  | 448,400   |  |  |  | 17,670,247 | 
|December 1  31, 2005 |  |           | 456,900   |          |  | $            | 40.16 |             |  |  | 456,900   |  |  |  | 17,213,347 | 
|                      |  |           |           |          |  |             
|Total                 |  |           | 1,246,800 |          |  | $            | 40.09 |             |  |  | 1,246,800 |  |  |  |            | 
|                      |  |           |           |          |  |             






|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In December 2004, the Companys Board of Directors
    authorized a program to repurchase up to 20 million shares
    of its outstanding common stock. Share repurchases under this
    program commenced in June 2005.





14




---



##### 

10K






Item 6  Selected Financial Data

CONSOLIDATED SELECTED FINANCIAL DATA  FIVE
YEARS

(Dollars in thousands, except per share amounts)

|                                                         |                                                                     |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |           |       |  
|-------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- | - | --------- | ----- |  | - | --------- | ----- | - | ---- | --------- | ----- | ---- | - | --------- | ----- | - | - | --------- | ----- | -
|                                                         |                                                                     |                                                |  
|                                                         |                                                                     | 2005                                           |   |           | 2004  |  |   | 2003      |       |   | 2002 |           |       | 2001 |  
|                                                         |                                                                     |                                                |  
|Summary of Operations For the
    Year Ended December 31 |                                                                     |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |          
|                                                         | Net sales                                                           |                                                | $ | 1,851,885 |       |  | $ | 1,838,238 |       |   | $    | 1,731,862 |       |      | $ | 1,674,403 |       |   | $ | 1,619,186 |      
|                                                         | Cost of products sold (includes
    excise taxes)                   |                                                |   | 443,131   |       |  |   | 412,641   |       |   |      | 384,487   |       |      |   | 358,931   |       |   |   | 344,360   |      
|                                                         | Selling, advertising and
    administrative expenses                |                                                |   | 518,797   |       |  |   | 513,570   |       |   |      | 470,740   |       |      |   | 447,709   |       |   |   | 435,478   |      
|                                                         | Antitrust litigation                                                |                                                |   | 11,762    |       |  |   | (582      | )     |   |      | 280,000   |       |      |   | 1,260,510 |       |   |   |          |      
|                                                         |                                                                     |                                               
|                                                         | Operating income (loss)                                             |                                                |   | 878,195   |       |  |   | 912,609   |       |   |      | 596,635   |       |      |   | (392,747  | )     |   |   | 839,348   |      
|                                                         | Interest, net                                                       |                                                |   | 50,578    |       |  |   | 75,019    |       |   |      | 76,905    |       |      |   | 46,146    |       |   |   | 33,765    |      
|                                                         |                                                                     |                                               
|                                                         | Earnings (loss) from continuing
    operations before income taxes  |                                                |   | 827,617   |       |  |   | 837,590   |       |   |      | 519,730   |       |      |   | (438,893  | )     |   |   | 805,583   |      
|                                                         |                                                                     |                                               
|                                                         | Income tax expense (benefit)                                        |                                                |   | 293,349   |       |  |   | 299,538   |       |   |      | 197,681   |       |      |   | (170,980  | )     |   |   | 309,876   |      
|                                                         |                                                                     |                                               
|                                                         | Earnings (loss) from continuing
    operations                      |                                                |   | 534,268   |       |  |   | 538,052   |       |   |      | 322,049   |       |      |   | (267,913  | )     |   |   | 495,707   |      
|                                                         | Loss from discontinued operations
    (including income tax effect) |                                                |   |          |       |  |   | (7,215    | )     |   |      | (3,260    | )     |      |   | (3,556    | )     |   |   | (4,105    | )    
|                                                         |                                                                     |                                               
|                                                         | Net earnings (loss)                                                 |                                                | $ | 534,268   |       |  | $ | 530,837   |       |   | $    | 318,789   |       |      | $ | (271,469  | )     |   | $ | 491,602   |      
|                                                         |                                                                     |                                               
|Per Share Data                                           |                                                                     |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |          
|                                                         | Basic earnings (loss) per share:                                    |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |           |      
|                                                         |                                                                     | Earnings (loss) from continuing
    operations |   | $         | 3.26  |  |   | $         | 3.26  |   |      | $         | 1.93  |      |   | $         | (1.59 | ) |   | $         | 3.02  |  
|                                                         |                                                                     | Loss from discontinued operations              |   |           |      |  |   |           | (.05  | ) |      |           | (.02  | )    |   |           | (.02  | ) |   |           | (.03  | )
|                                                         |                                                                     |                                               
|                                                         | Basic earnings (loss) per share                                     |                                                |   | 3.26      |       |  |   | 3.21      |       |   |      | 1.91      |       |      |   | (1.61     | )     |   |   | 2.99      |      
|                                                         |                                                                     |                                               
|                                                         | Diluted earnings (loss) per share:                                  |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |           |      
|                                                         |                                                                     | Earnings (loss) from continuing
    operations |   |           | 3.23  |  |   |           | 3.23  |   |      |           | 1.92  |      |   |           | (1.59 | ) |   |           | 2.99  |  
|                                                         |                                                                     | Loss from discontinued operations              |   |           |      |  |   |           | (.04  | ) |      |           | (.02  | )    |   |           | (.02  | ) |   |           | (.02  | )
|                                                         |                                                                     |                                               
|                                                         | Diluted earnings (loss) per share                                   |                                                |   | 3.23      |       |  |   | 3.19      |       |   |      | 1.90      |       |      |   | (1.61     | )     |   |   | 2.97      |      
|                                                         |                                                                     |                                               
|                                                         | Dividends per share                                                 |                                                |   | 2.20      |       |  |   | 2.08      |       |   |      | 2.00      |       |      |   | 1.92      |       |   |   | 1.84      |      
|                                                         | Market price per share:                                             |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |           |      
|                                                         |                                                                     | High                                           |   | $         | 56.90 |  |   | $         | 48.97 |   |      | $         | 37.79 |      |   | $         | 41.35 |   |   | $         | 36.00 |  
|                                                         |                                                                     | Low                                            |   |           | 37.59 |  |   |           | 34.00 |   |      |           | 26.73 |      |   |           | 25.30 |   |   |           | 23.38 |  
|Financial Condition at
    December 31                   |                                                                     |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |          
|                                                         | Cash and cash equivalents                                           |                                                | $ | 202,025   |       |  | $ | 450,202   |       |   | $    | 433,040   |       |      | $ | 382,003   |       |   | $ | 271,969   |      
|                                                         | Current assets                                                      |                                                |   | 889,554   |       |  |   | 1,173,133 |       |   |      | 1,247,966 |       |      |   | 2,291,267 |       |   |   | 891,959   |      
|                                                         | Current liabilities                                                 |                                                |   | 258,778   |       |  |   | 618,873   |       |   |      | 521,093   |       |      |   | 1,462,442 |       |   |   | 222,462   |      
|                                                         | Working capital                                                     |                                                |   | 630,776   |       |  |   | 554,260   |       |   |      | 726,873   |       |      |   | 828,825   |       |   |   | 669,497   |      
|                                                         | Ratio of current assets to current
    liabilities                  |                                                |   | 3.4:1     |       |  |   | 1.9:1     |       |   |      | 2.4:1     |       |      |   | 1.6:1     |       |   |   | 4:1       |      
|                                                         | Total assets                                                        |                                                |   | 1,366,983 |       |  |   | 1,659,483 |       |   |      | 1,726,494 |       |      |   | 2,765,275 |       |   |   | 2,011,702 |      
|                                                         | Long-term debt                                                      |                                                |   | 840,000   |       |  |   | 840,000   |       |   |      | 1,140,000 |       |      |   | 1,140,000 |       |   |   | 862,575   |      
|                                                         | Total debt                                                          |                                                |   | 840,000   |       |  |   | 1,140,000 |       |   |      | 1,140,000 |       |      |   | 1,140,000 |       |   |   | 865,875   |      
|                                                         | Stockholders equity (deficit)                                      |                                                |   | 75,098    |       |  |   | 9,565     |       |   |      | (115,187  | )     |      |   | (46,990   | )     |   |   | 581,062   |      
|Other Data                                               |                                                                     |                                                |   |           |       |  |   |           |       |   |      |           |       |      |   |           |       |   |   |          
|                                                         | Stock repurchased                                                   |                                                | $ | 200,038   |       |  | $ | 200,031   |       |   | $    | 150,095   |       |      | $ | 50,262    |       |   | $ |          |      
|                                                         | Dividends paid                                                      |                                                | $ | 361,208   |       |  | $ | 344,128   |       |   | $    | 332,986   |       |      | $ | 324,233   |       |   | $ | 303,277   |      
|                                                         | Dividends paid as a percentage of
    net earnings                  |                                                |   | 67.6      | %     |  |   | 64.8      | %     |   |      | 104.5     | %     |      |   | N/M       |       |   |   | 61.7      | %    
|                                                         | Return on net sales                                                 |                                                |   | 28.8      | %     |  |   | 28.9      | %     |   |      | 18.4      | %     |      |   | N/M       |       |   |   | 30.4      | %    
|                                                         | Return on average assets                                            |                                                |   | 35.3      | %     |  |   | 31.4      | %     |   |      | 14.2      | %     |      |   | N/M       |       |   |   | 26.9      | %    
|                                                         | Average number of shares (in
    thousands)  basic                 |                                                |   | 163,949   |       |  |   | 165,164   |       |   |      | 166,572   |       |      |   | 168,786   |       |   |   | 164,250   |      
|                                                         | Average number of shares (in
    thousands)  diluted               |                                                |   | 165,497   |       |  |   | 166,622   |       |   |      | 167,376   |       |      |   | 168,786   |       |   |   | 165,682   |      

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.


Certain prior year amounts have been reclassified to conform
to the 2005 financial statement presentation.






15




---



##### 

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

UST INC.

MANAGEMENTS DISCUSSION AND ANALYSIS

The following discussion and analysis of the Companys
consolidated results of operations and financial condition
should be read in conjunction with the consolidated financial
statements and notes thereto, included in Part II,
Item 8 of this
Form 10-K. Herein
the Company makes forward-looking statements that involve risks,
uncertainties, and assumptions. Actual results may differ
materially from those anticipated in these forward-looking
statements as a result of various factors, including, but not
limited to, those presented under Cautionary Statement
Regarding Forward-Looking Information on page 32. In
addition, the Company has presented certain risk factors
relevant to the Companys business in Item 1A in
Part I of this
Form 10-K.

Overview

UST Inc. is a holding company for its wholly-owned subsidiaries:
U.S. Smokeless Tobacco Company and International
Wine & Spirits Ltd. Through its largest subsidiary,
U.S. Smokeless Tobacco Company, the Company is a leading
manufacturer and marketer of moist smokeless tobacco products
including brands such as Copenhagen, Skoal, Red Seal, Husky and
Rooster. Through International Wine & Spirits Ltd., the
Company produces and markets premium wines sold nationally under
labels such as Chateau Ste. Michelle, Columbia Crest, Conn
Creek, Villa Mt. Eden, Red Diamond, Distant Bay and 14 Hands. In
addition, the Company produces and markets sparkling wine under
the Domaine Ste. Michelle label.

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

The Companys objective in the Smokeless Tobacco segment is
to continue to grow the moist smokeless tobacco category by
building awareness and social acceptability of smokeless tobacco
products among adult smokers and by being competitive in every
moist smokeless tobacco category segment. Over the past several
years, industry trends have shown that some adult consumers have
migrated from premium brands to brands in the price value and
sub-price value segments. As such, a key to the Companys
future growth and profitability is attracting growing numbers of
adult consumers, primarily smokers, as approximately every
1 percent of adult smokers who convert to moist smokeless
tobacco represents a 10 percent increase in the
segments adult consumer base, and consumer research
indicates that the majority of new adult consumers enter the
category in the premium segment. In addition to advertising
initiatives focused on category growth, in 2004 the Company
initiated a direct mail program to over one million adult
smokers and began an advertising campaign to promote the
convenience of smokeless tobacco relative to cigarettes. As a
result of its success in 2004, the direct mail program was
repeated in 2005. While the Company remains committed to its
category growth initiatives, it is also focused on efforts to
increase adult consumer loyalty within the premium segment of
the moist smokeless tobacco category. These efforts are designed
to deliver value to these adult consumers through promotional
spending and other price-focused initiatives.

Product innovation remains a crucial element of the Smokeless
Tobacco segments success, evidenced by the fact that
11.5 percent of total net sales volume in 2005 came from
products introduced in the last three years. The Company remains
committed to developing product and packaging initiatives that
cover both potential core product launches and other possible
innovations. One of the core product launches scheduled for the
first quarter of 2006 is the introduction of Copenhagen Long Cut
Straight.

Consistent with the Wine segments strategy, the
Companys focus is to become the leader in the
ultra-premium wine segment, to elevate Washington state wines to
the quality and prestige of the top wine regions of the world,
and to be known for superior products, innovation and customer
focus. The environment in which the Companys Wine segment
operates is very competitive, and has been subject to recent
industry consolidation. Additionally, changes in the supply of
grapes, as well as changes in consumer preferences, have
affected and may continue to affect this environment. The impact
of industry-wide grape oversupply, which





16



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##### 

10K


arose as the result of increased vineyard plantings in the late
1990s, has begun to subside; however, recent reports show
large 2005 harvests in California and Australia. In
addition, recent data indicate that adult per capita wine
consumption in the United States is at an all-time high, and
that the wine category is expanding more rapidly than the other
segments of the alcohol beverage industry. As a result, the
Company remains focused on the continued expansion of its sales
force and category management staff to broaden the distribution
of its wine in the domestic market, especially in certain
account categories such as restaurants, wholesale chains and
mass merchandisers. Sustained growth in the wine segment will
also be dependent on the successful introduction of new products
and extension of existing product lines.

Discussion of the Companys plans and initiatives in the
Smokeless Tobacco and Wine segments is included in the
Outlook section of Managements Discussion and
Analysis on page 25.

The Company again reported record results in net sales for the
year ended December 31, 2005 despite continued competitive
pressures in the smokeless tobacco and wine industries. The
increase in net sales resulted in part from the Companys
strategic initiatives aimed at strengthening and expanding the
Companys wine business and improved performance by
international smokeless tobacco operations, partially offset by
the decline in the Smokeless Tobacco segment net sales compared
to 2004. However, decreased operating profit for the Smokeless
Tobacco segment more than offset increased operating profit for
both the Wine segment and All Other Operations. Record net
earnings and diluted earnings per share in 2005 resulted
primarily from lower net interest expense and lower income
taxes. Decreased income taxes were due to the tax deduction
available in 2005 for qualified domestic production activities,
which was enacted by the American Jobs Creation Act of 2004.

Results of Operations

CONSOLIDATED RESULTS

|                           |  |                        |           |  |      |   |           |      |  |   |           | 
|-------------------------- |  | ---------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                           |  | (Dollars in thousands, |          
|                           |  | except per share data) |          
|                           |  |                        |          
|                           |  | 2005                   |           |  | 2004 |   |           | 2003 | 
|                           |  |                        |          
|Net sales                  |  | $                      | 1,851,885 |  |      | $ | 1,838,238 |      |  | $ | 1,731,862 | 
|Net earnings               |  |                        | 534,268   |  |      |   | 530,837   |      |  |   | 318,789   | 
|Basic earnings per share   |  |                        | 3.26      |  |      |   | 3.21      |      |  |   | 1.91      | 
|Diluted earnings per share |  |                        | 3.23      |  |      |   | 3.19      |      |  |   | 1.90      | 











17




---



##### 

Managements Discussion and Analysis(Continued)

in overall product mix for moist smokeless tobacco, as well as
higher case volume for wine, which sells at lower margins than
smokeless tobacco products. The decrease in gross margin
percentage in 2005 was partially offset by higher selling prices
for moist smokeless tobacco products.

SA&A expenses increased 1 percent to
$518.8 million in 2005 primarily due to higher indirect
selling costs, expenses associated with retail shelving systems,
a charge recorded for the impairment of certain goodwill and
intangible assets and legal-related spending in the Smokeless
Tobacco segment, partially offset by lower direct advertising
costs in the Smokeless Tobacco segment and the recovery of
amounts due in connection with a bankrupt smokeless tobacco
customer. The increased consolidated SA&A expenses also
reflected higher salaries and related costs in the Wine segment
related to its expanded sales force. Corporate expenses
decreased in 2005 due to lower costs associated with employee
bonuses and lower debt-related costs, partially offset by higher
compensation costs for non-employee directors and other
administrative costs.

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, 2005 and 2004, outside legal fees and other
internal and external costs incurred in connection with
administering and litigating product liability claims were
$13.9 million and $9.5 million, respectively. These
costs reflect a number of factors, including the number of
claims, and the legal and regulatory environments affecting the
Companys products. The Company expects these factors to be
the primary influence on its future costs of administering and
litigating product liability claims. The Company does not expect
these costs to increase significantly in the future; however, it
is possible that adverse changes in the aforementioned factors
could have a material adverse effect on such costs, as well as
on results of operations and cash flows in the periods such
costs are incurred.

The Company reported operating income of $878.2 million in
2005, which decreased 3.8 percent from $912.6 million
in 2004 and represented 47.4 percent of 2005 consolidated
net sales.

Net interest expense decreased $24.4 million, primarily as
a result of lower levels of debt outstanding, due to the
$300 million repayment of senior notes which matured in
March 2005. The net decrease in 2005 was also the result of
higher interest income earned from cash equivalent investments,
primarily due to higher interest rates, partially offset by
lower average levels of investments.

The Company recorded income tax expense on earnings from
continuing operations of $293.3 million in 2005 compared to
$299.5 million in 2004. Results in 2005 and 2004 included
reversals of income tax accruals of $18 million and
$20 million, net of federal income tax benefit,
respectively. Adjustments to income tax accruals are in part due
to changes in facts and circumstances, including the settlement
of various income tax audits by the Internal Revenue Service
(IRS) and other taxing authorities and lapses of
statutes of limitation. The Companys effective tax rate
decreased slightly to 35.4 percent in 2005 from
35.8 percent in 2004. The effective tax rate in 2005 was
favorably impacted by the $8 million tax benefit from the
deduction available for qualified domestic production
activities, which was enacted by the American Jobs Creation Act
of 2004. The Company expects to recognize a similar deduction in
2006.

Basic and diluted earnings per share for 2005 were $3.26 and
$3.23, respectively, which reflected an increase of
1.6 percent and 1.3 percent over each of the
corresponding comparative measures in 2004. Average basic shares
outstanding were lower in 2005 than those in 2004 primarily as a
result of share repurchases in late 2004, partially offset by
the exercise of stock options. Average diluted shares
outstanding in 2005 were lower than those in 2004 due to the
impact of the share repurchases and a lower level of outstanding
options in 2005.

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





18



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##### 

10K


entity transferred in 2004. See the Discontinued Operations note
to the Consolidated Financial Statements for additional details.

2004 compared with 2003

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

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

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

Consolidated SA&A expenses increased 9.1 percent to
$513.6 million in 2004 primarily due to a
$15.9 million reduction in expense for the Companys
incentive compensation (bonus) fund, partially offset by
$4.2 million in SA&A charges, both of which were
recorded in 2003 for Rickard Seeds. SA&A expenses also
increased in 2004 as a result of incremental spending for direct
selling and advertising initiatives in the Smokeless Tobacco
segment in connection with the Companys plan to grow the
smokeless tobacco category, and higher administrative expenses.
The SA&A variance was also impacted by a $4.4 million
charge recorded in 2003, related to the bankruptcy filing of a
significant smokeless tobacco customer. Corporate expenses
increased in 2004 due to higher professional fees, salaries and
related costs and other administrative expenses, offset by lower
legal spending.

For the years ended December 31, 2004 and 2003, outside
legal fees and other internal and external costs incurred in
connection with administering and litigating product liability
claims were $9.5 million and $8.9 million,
respectively. These costs reflect a number of factors, including
the number of claims, and the legal and regulatory environments
affecting the Companys products.

The Company reported operating income of $912.6 million in
2004, which increased 53 percent from 2003 and represented
49.6 percent of 2004 consolidated net sales.

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





19



---



##### 

Managements Discussion and Analysis(Continued)

The Company recorded income tax expense of $299.5 million
in 2004 at an effective tax rate of 35.8 percent compared
to income tax expense of $197.7 million in 2003 at an
effective tax rate of 38 percent. The decreased effective
tax rate reflects the impact of the $20 million in income
tax accrual reversals, net of federal income tax benefit, in
2004.

Basic and diluted shares outstanding were lower in 2004 than in
2003, primarily as a result of share repurchases, partially
offset by the exercise of stock options.

Net earnings for 2004 included an after-tax loss of
$7.2 million from discontinued operations compared to an
after-tax loss of $3.3 million in 2003. Discontinued
operations in 2003 reflect the reclassified results of the
Companys cigar operation, which had previously been
reported as a component of All Other Operations.

Smokeless Tobacco Segment

|                 |  |                        |           |  |      |   |           |      |  |   |           | 
|---------------- |  | ---------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                 |  | (Dollars in thousands) |          
|                 |  |                        |          
|                 |  | 2005                   |           |  | 2004 |   |           | 2003 | 
|                 |  |                        |          
|Net sales        |  | $                      | 1,561,667 |  |      | $ | 1,575,254 |      |  | $ | 1,504,893 | 
|Operating profit |  |                        | 852,478   |  |      |   | 897,991   |      |  |   | 585,910   | 













20




---



##### 

10K


reduction in straight stock volume, partially offset by an
increase in net unit volume for value packs. Additionally,
premium pre-pack promotional net unit volume in 2005 declined
compared to 2004.

Net unit volume for price value products increased by
18.5 percent to 84.4 million cans in 2005, primarily
as a result of the continued expansion of the Companys
sub-price value product, Husky, which included increased
straight stock and pre-pack promotional net unit volume. Red
Seal, the Companys traditional price value product, and
Husky accounted for approximately 13.5 percent of 2005
total moist smokeless tobacco net unit volume, as compared to
11.1 percent in 2004.

As previously mentioned, the Company remains committed to
developing product and packaging initiatives that cover both
potential core product launches and other possible innovations.
Net can sales for 2005 included approximately 71.8 million
cans of new products launched within the last three years,
representing 11.5 percent of total moist smokeless tobacco
unit volume. These new products included Skoal Long Cut Apple
Blend, Skoal Long Cut Peach Blend, Skoal Long Cut Vanilla Blend,
Skoal Long Cut Berry Blend, Skoal and Copenhagen Pouches, three
new Red Seal products and all Husky products.

The Companys Retail Activity Data Share & Volume
Tracking System (RAD-SVT), which measures shipments to retail,
indicates that for the
year-to-date period
ended December 24, 2005, total moist smokeless tobacco
category retail shipments increased 5 percent over the
similar prior year period, on a can-volume basis, while retail
shipments of the Companys moist smokeless tobacco products
declined 1.2 percent during the same period. The premium
segment declined 4.6 percent, with the Companys
premium products down 4.1 percent. The value segments,
which include price value and sub-price value, increased
25.8 percent during the same period, with the
Companys value segment products up 20.8 percent. The
Companys share of the total category declined
4 percentage points, to 65.3 percent, from the
comparable 2004 period. When applying retail pricing data from
ACNielsen to the periods RAD-SVT shipment data, the moist
smokeless tobacco category revenues grew 4.3 percent in
2005 over the
2004 year-to-date
period. The Companys revenue share over the
year-to-date period was
76.7 percent, down 1.4 percentage points from the
corresponding 2004 period.
RAD-SVT information is
provided as an indication of current domestic moist smokeless
tobacco trends from wholesale to retail and is not intended as a
basis for measuring the Companys financial performance.
This information can vary significantly from the Companys
actual results due to the fact that the Company reports net
shipments to wholesale, while
RAD-SVT measures
shipments from wholesale to retail. In addition, differences in
the time periods measured, as well as new product introductions
and promotions affect comparisons of the Companys actual
results to those from RAD-SVT.

Cost of products sold increased 5.6 percent in 2005,
primarily as a result of higher unit costs, impairment charges
related to certain manufacturing equipment and $3.2 million
in incremental charges recorded in connection with the tobacco
quota buyout legislation enacted late in 2004. Cost of products
sold in 2005 was favorably affected by lower comparative
inventory write-downs at Rickard Seeds. The increased moist
smokeless tobacco unit costs were primarily the result of higher
costs for certain packaging and production materials, and higher
salaries and related costs for direct labor and overhead.

Gross profit decreased 2.1 percent in 2005 compared to
2004, primarily as a result of the decrease in net sales, as
previously described, as well as by the aforementioned cost of
products sold variance. The gross profit percentage declined to
82.6 percent in 2005, from 83.6 percent in 2004, as a
result of these factors.

SA&A expenses increased 1.2 percent in 2005 to
$425 million, compared to $420 million in 2004.
Selling and advertising expenses included higher costs related
to retail shelving systems used to promote the moist smokeless
tobacco categorys products, which included charges
resulting from a physical inventory of previously installed
units. Indirect selling and advertising expenses in 2005 also
included higher salaries and related costs incurred in support
of the Companys smokeless tobacco category growth
initiatives. These increases were significantly offset by lower
costs for print advertising, sponsorships, and trade promotional
materials. Administrative and other expenses increased in 2005,
primarily as a result of higher legal-related spending and
compensation costs, as well as for an impairment charge recorded
for goodwill and intangible assets at Rickard Seeds of
$3.3 million, partially offset by the gain recognized from
the sale of the Companys corporate aircraft and the
recovery of amounts due in connection with a bankrupt smokeless
tobacco customer.





21



---



##### 

Managements Discussion and Analysis(Continued)

Results for the Smokeless Tobacco segment included the
aforementioned net pre-tax charge of $11.8 million recorded
in connection with the settlement of certain states
indirect purchaser antitrust actions that were for amounts in
excess of those previously reserved. See the Contingencies note
to the Consolidated Financial Statements for additional details.

As a result of the aforementioned factors, segment operating
profit in 2005 was $852.5 million, representing a decrease
of 5.1 percent from 2004 operating profit of
$898 million.

2004 compared with 2003

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

Overall, net unit volume for premium products declined
1.2 percent in 2004, primarily as a result of a
31 percent reduction in pre-pack promotional volume,
compared to the prior year, partially offset by a
0.3 percent increase in net unit volume for standard
products. Approximately 40 percent, or 3 million cans,
of the reduction in pre-pack promotional volume was due to the
absence of a 15-gram can test, which took place in the fourth
quarter of 2003. The Company believes this was more than offset
by 3.7 million cans of premium net unit volume, resulting
from some customers increasing inventories in the fourth quarter
of 2004 in advance of the January 1, 2005 price increase
for premium products. Additionally, premium pre-pack promotional
net unit volume in 2004 declined compared to 2003. The increased
net unit volume for standard premium products included higher
value pack can sales, which represented approximately
1.5 percent of total premium net unit volume, compared to
0.6 percent in 2003.

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

RAD-SVT indicated that for the
year-to-date period
ended December 25, 2004, total moist smokeless tobacco
category retail shipments increased 5.9 percent over the
similar prior year period, on a can-volume basis. Although the
Companys share of total category declined
2.8 percentage points to 69.3 percent, the
Companys retail shipments on a can-volume basis increased
1.8 percent from the similar prior year period. The premium
segments decline moderated to 0.8 percent, while the
Companys premium net volume decreased 0.2 percent in
the corresponding period. The moist smokeless tobacco
categorys value segments increased 24.5 percent
during the same period, with the Companys net volume of
combined price value and sub-price value increasing
18.8 percent over the comparative period. The 2003 RAD-SVT
data, which is used in the above comparisons, has been restated
in order to improve the overall reporting accuracy of the
information by incorporating refinements to the projection
methodology.

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





22



---



##### 

10K


Gross profit increased 4.9 percent in 2004 compared to the
similar 2003 period. This increase was primarily the result of
increased net sales, as previously described, partially offset
by the aforementioned cost of products sold variance. The gross
profit percentage remained level in 2004 at 83.6 percent as
a result of these factors.

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

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

As a result of the aforementioned factors, segment operating
profit in 2004 was $898 million, representing an increase
of 53.3 percent from $585.9 million in 2003.

Wine Segment

|                 |  |                        |         |  |      |   |         |      |  |   |         | 
|---------------- |  | ---------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                 |  | (Dollars in thousands) |        
|                 |  |                        |        
|                 |  | 2005                   |         |  | 2004 |   |         | 2003 | 
|                 |  |                        |        
|Net sales        |  | $                      | 248,342 |  |      | $ | 226,650 |      |  | $ | 194,905 | 
|Operating profit |  |                        | 37,764  |  |      |   | 32,382  |      |  |   | 24,341  | 



Restaurant Wine Wine & Spirits






23




---



##### 

Managements Discussion and Analysis(Continued)

Segment cost of products sold in 2005 increased
10.6 percent from 2004, primarily as a result of increased
case volume. The gross profit percentage decreased slightly in
2005, primarily as a result of increased case costs and higher
sales incentives for Chateau Ste. Michelle and Columbia Crest
products, partially offset by the shift towards higher priced
varietals.

SA&A expenses were $54.9 million in 2005, representing
an increase of 2.5 percent from 2004. Selling and
advertising expenses were lower, predominantly as a result of
lower print advertising costs, while indirect selling expenses
increased primarily as a result of higher salaries and related
costs for a continued sales force expansion aimed at broadening
distribution of the Companys wines throughout the domestic
market. During 2005, the Wine segment achieved further
distribution gains in various market segments, including
restaurants, wholesale clubs and mass merchandisers, as a result
of this sales force expansion. Administrative and other spending
was down slightly in 2005.

As a result of the aforementioned factors, Wine segment
operating profit increased 16.6 percent to
$37.8 million in 2005 from $32.4 million in 2004.

2004 compared with 2003

Net sales for the Wine segment increased 16.3 percent to
$226.7 million and represented 12.3 percent of 2004
consolidated net sales. The net sales increase was primarily the
result of increased premium case volume versus the prior year,
as the Company increased distribution through the expansion of
its sales force. Case volume results for the Companys two
leading brands were strong as Chateau Ste. Michelle increased
11.9 percent and Columbia Crest increased 12.8 percent
from 2003 levels. These two leading brands accounted for
76.4 percent of the Companys total 2004 premium case
volume. Sales in 2004 were positively impacted as a result of
increased media acclaim and editorial coverage in 2004,
including recognition of Ste. Michelle Wine Estates as the
2004 American Winery of the Year, awarded by Wine
Enthusiastmagazine. Exceptional wine ratings in 2004 for
more than double the varietals achieving the same level of
ratings in 2003 also contributed to the increase in net sales
for 2004. The increase in net sales in 2004 was also partially
attributable to the success of Red Diamond and certain product
line extensions. 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.

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

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

As a result of the above mentioned factors, Wine segment
operating profit increased 33 percent to $32.4 million
in 2004, from $24.3 million in 2003.

All Other Operations

|                 |  |                        |        |  |      |   |        |      |  |   |        | 
|---------------- |  | ---------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                 |  | (Dollars in thousands) |       
|                 |  |                        |       
|                 |  | 2005                   |        |  | 2004 |   |        | 2003 | 
|                 |  |                        |       
|Net sales        |  | $                      | 41,876 |  |      | $ | 36,334 |      |  | $ | 32,064 | 
|Operating profit |  |                        | 14,338 |  |      |   | 10,266 |      |  |   | 7,962  | 





24




---



##### 

10K


2005 compared with 2004

Net sales for All Other Operations increased 15.3 percent
to $41.9 million and accounted for 2.3 percent of
consolidated net sales in 2005. The increase in net sales was
primarily the result of higher unit volume for moist smokeless
tobacco products sold by the Companys international
operations, mainly in Canada. In addition, the increase also
included the impact of a favorable foreign exchange rate. The
gross margin percentage for All Other Operations increased
2.9 percent in 2005 as compared to 2004, as increases in
cost of products sold, also related to higher net unit volume,
were more than offset by the impact of the favorable foreign
exchange rate on net sales. All Other Operations reported an
operating profit of $14.3 million in 2005, which
represented an increase of 39.7 percent from 2004.

2004 compared with 2003

Net sales for All Other Operations increased 13.3 percent
to $36.3 million and accounted for 2 percent of
consolidated net sales in 2004. The increase in net sales was
primarily the result of higher unit volume for moist smokeless
tobacco products sold by the Companys international
operations. In addition, the increase also included the impact
of a favorable foreign exchange rate. All Other Operations
reported an operating profit of $10.3 million for 2004,
which represented an increase of 28.9 percent from 2003.

Discontinued Operations

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

Outlook

Although the Company achieved record net sales, net earnings and
diluted earnings per share in 2005, both the consolidated
results and the results for the Smokeless Tobacco segment were
below original projections. While the Company remains committed
to its category growth initiatives, which continue to be
successful, the Company will significantly increase focus on
efforts to increase adult consumer loyalty to the Companys
premium moist smokeless tobacco brands. These efforts are
designed to provide the Companys current adult premium
consumers with additional value through promotional spending and
other price-focused initiatives. The use of such measures has
been undertaken in response to industry trends which indicate
that many adult consumers are trading down from premium brands
to brands in the price value and sub-price value segments. The
continued migration in 2005 to lower-priced moist smokeless
tobacco products primarily resulted from widening price gaps at
retail, exacerbated by higher gasoline prices.

The Company has announced that it will spend an additional
$80 million in 2006 to stabilize premium net unit volume
and strengthen premium loyalty. This incremental spending will
be focused on delivering improved value to adult consumers of
premium products through promotional programs and other
price-focused initiatives. These programs and initiatives will
be deployed on a state-by-state basis, with varying levels of
spending based on the categorization of each state as a focus
state, emerging concern state or premium growth state. The focus
states represent the majority of the Companys premium
volume losses in 2005, and are characterized by relatively low
per capita income and higher price value consumption. While the
incremental spending will be more heavily directed towards these
focus states, all regions will receive significant spending
increases.

In addition, the Company has announced that it will continue to
build upon its successful category growth initiatives, focused
on converting adult smokers to the moist smokeless tobacco
category, by spending an additional $11 million in 2006.
These initiatives, highlighted by direct mail to adult smokers,
additional showcase shelving unit placements,
one-on-one marketing to
adults, and product and packaging innovation, have all
contributed to acceleration of category growth over the past
three years.

The Companys plan for 2006 is designed to support
continued strong category growth, focused on conversion of adult
smokers, while increasing premium brand loyalty. Premium net
unit volume in the first half





25



---



##### 

Managements Discussion and Analysis(Continued)

of 2006, adjusted for the aforementioned net unit volume shift
of 3.7 million cans in 2005 in advance of the price
increase, is anticipated to be lower than the first half of
2005, but should reflect a significant improvement in trend.
Premium net unit volume is expected to stabilize by the second
half of 2006.

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, may be adversely affected by
competition, changes in consumer preferences, pricing, including
its impact on the relative mix of premium versus price value and
sub-price value product sales, acceptance of new products and
other marketing initiatives, excise taxes, the effects of
possible litigation and legislative and regulatory actions,
including restrictions on the use of flavorings and increases in
the minimum age to purchase tobacco products. See
Item 1A  Risk Factors of this
Form 10-K for
additional details.

Overall, 2005 was an outstanding year for the Wine segment, as
it delivered accretive revenue and operating profit growth for
the Company, achieving record annual operating profit. The Wine
segment forecasts continued growth in 2006 despite several
challenges that lie ahead. In 2005, domestic oversupply issues
were somewhat alleviated, as California bulk wine inventories
declined; however, oversupply in Australia grew considerably and
poses the most significant risk to short-term pricing at retail.
In addition, industry trends for the second half of 2005
reflected a total volume decline for the Merlot varietal. Given
this trend, special emphasis will be placed on Merlot through
sales and marketing programs to ensure momentum in 2006. In
addition, the Company plans to build upon its position as the
category leader in Riesling wine sales by expanding its
production of this highly demanded varietal. The Company
believes it has the right strategies in place to minimize the
impact of the aforementioned challenges and that, as a result,
the Wine segment is positioned for continued growth in 2006,
with an expanded sales force that continues to gain greater
distribution, innovative marketing programs and improved product
quality.

The performance of the wine business in the future may be
impacted by competition, pricing, availability of grapes, acts
of nature, changes in consumer preferences, published wine
ratings and other editorial and media coverage, and the effects
of possible legislative actions and tax changes. See
Item 1A  Risk Factors of this
Form 10-K for
additional details.

The Company is committed to delivering exceptional operating
performance in each of its business segments. The Company
presently anticipates diluted earnings per share in 2006 in the
range of $3.00 to $3.14, with a target of $3.05. This earnings
decline from 2005 is primarily the result of the planned
incremental $91 million in spending related to the
smokeless tobacco business premium volume stabilization
and category growth initiatives in 2006. See
Item 1A  Risk Factors of this
Form 10-K for
additional details.

The Companys financial forecast for 2006 and beyond may be
affected by the Companys ability to address the factors
described above impacting each of its business segments, as well
as the matters described under Cautionary Statements
Regarding Forward-Looking Statements and under
Item 1A  Risk Factors.

Financial Condition

Liquidity

|                          |  |                        |         |  |      |   |           |      |  |   |           | 
|------------------------- |  | ---------------------- | ------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                          |  | (Dollars in thousands) |        
|                          |  |                        |        
|                          |  | 2005                   |         |  | 2004 |   |           | 2003 | 
|                          |  |                        |        
|Cash and cash equivalents |  | $                      | 202,025 |  |      | $ | 450,202   |      |  | $ | 433,040   | 
|Short-term investments    |  |                        | 10,000  |  |      |   | 60,000    |      |  |   | 5,000     | 
|Total debt                |  |                        | 840,000 |  |      |   | 1,140,000 |      |  |   | 1,140,000 | 







26




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##### 

10K


The Companys cash and cash equivalents totaled
$202 million at December 31, 2005, a decrease of
$248.2 million from December 31, 2004. This decrease
was primarily related to the $300 million repayment of
senior notes, upon maturity, in March of 2005 (see the Borrowing
Arrangements note to the Consolidated Financial Statements for
additional details). The major sources of cash in 2005 were net
earnings generated mainly by the Smokeless Tobacco segment and
proceeds from the issuance of common stock via stock option
exercises. The major uses of cash were for dividend payments,
the aforementioned repayment of senior notes and the repurchase
of Company stock.

Short-term investments at December 31, 2005 and 2004 were
comprised of auction-rate securities (ARS), which
are long-term variable (floating) rate bonds that are tied
to short-term interest rates. The stated maturities for these
securities are generally 20 to 30 years, but their floating
interest rates are reset at seven, 28 or
35-day intervals via a
Dutch Auction process. Given the fact that ARS are floating rate
investments, they are typically traded at par value, with
interest paid at each auction.

In 2004, the Company paid $200 million in connection with
its resolution of an antitrust action brought by a smokeless
tobacco competitor.

In 2003, the litigation liability associated with the 2002
adverse antitrust judgment against the Company of
$1.262 billion was paid. However, the overall effect on
reported cash and cash equivalents was minimal as the Company
paid the judgment primarily out of funds that had been held in
restricted deposits, which were a component of financing
activities in 2003 on the Consolidated Statement of Cash Flows.
Given the size of the award, the Company recognizes that the
payment of the judgment had, at the time of payment, a material
adverse effect on its consolidated financial position. However,
in light of the Companys ability to satisfy the judgment
primarily with funds accumulated since the initial rendering of
the judgment, the payment of the judgment did not have a
material adverse effect on the Companys dividend policy or
its ability to implement its strategic business plans.

|                                    |  |                        |          |   |      |   |          |      |  |   |          |  
|----------------------------------- |  | ---------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                    |  | (Dollars in thousands) |         
|                                    |  |                        |         
|                                    |  | 2005                   |          |   | 2004 |   |          | 2003 | 
|                                    |  |                        |         
|Net cash provided by (used
    in): |  |                        |          |   |      |   |          |      |  |   |          |  
|Operating activities                |  | $                      | 560,699  |   |      | $ | 565,415  |      |  | $ | (702,852 | )
|Investing activities                |  |                        | (17,005  | ) |      |   | (118,370 | )    |  |   | (53,747  | )
|Financing activities                |  |                        | (791,871 | ) |      |   | (429,883 | )    |  |   | 807,636  |  











27




---



##### 

Managements Discussion and Analysis(Continued)

ately carried at the lower of cost or market. Total expenditures
for leaf tobacco over the last three years were
$241.9 million, while the total costs of grapes harvested
and purchased and purchases of bulk wine were
$210.6 million over the last three years.

Investing Activities

Net cash used in investing activities in 2005 of
$17 million was due to the purchase of property, plant and
equipment of $89.9 million, including the replacement of
Company aircraft. This amount was partially offset by net
proceeds from short-term investments of $50 million and
proceeds from the disposition of property, plant and equipment
of $22.9 million, primarily related to proceeds from the
sale of the Companys former aircraft. Over the last three
years, capital expenditures for property, plant and equipment
have averaged approximately $69.7 million per year.

Major areas of capital spending from 2003 through 2005 by
segment were:

Smokeless Tobacco segment




    Manufacturing, processing and packaging equipment
    Retail marketing display fixtures
    Computer equipment and software
    Building improvements and renovations
    Company aircraftWine segment




    Wine barrels and storage tanks
    Computer software and equipment
    Wine making and processing equipment
    Facilities expansion and renovationsOver the past three years, capital expenditures for the
Smokeless Tobacco segment accounted for 80.6 percent of the
consolidated total capital expenditures, while the Wine segment
accounted for 18.2 percent and All Other Operations and
corporate accounted for 1.2 percent. Capital expenditures
in the Smokeless Tobacco segment over the past three years were
for equipment, primarily related to assuring manufacturing
capabilities, new product innovations and product line extension
capabilities, and for the replacement of Company aircraft, from
which the Company recognized a $2.7 million gain in 2005.
Wine segment capital expenditures during that period were
primarily for increased capacity and expansion.

Financing Activities

The Company had net cash used in financing activities of
$791.9 million and $429.9 million in 2005 and 2004,
respectively. The increase in 2005 was primarily related to the
aforementioned $300 million repayment of senior notes, upon
maturity, in March 2005. Cash dividends paid in 2005 were higher
than those in 2004 due to a 5.8 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 in each of the years 2005 and
2004 were approximately $200 million. Proceeds from the
issuance of common stock were lower than those received in 2004
primarily as a result of a decrease in the number of stock
options exercised. The 2003 amount of net cash provided by
financing activities was primarily attributable to the
Companys utilization of $1.242 billion of funds held
in restricted deposits to substantially pay the aforementioned
2002 antitrust judgment.





28



---



##### 

10K


Capital Resources

|                |  |                        |         |  |      |   |           |      |  |   |           | 
|--------------- |  | ---------------------- | ------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                |  | (Dollars in thousands) |        
|                |  |                        |        
|                |  | 2005                   |         |  | 2004 |   |           | 2003 | 
|                |  |                        |        
|Working capital |  | $                      | 630,776 |  |      | $ | 554,260   |      |  | $ | 726,873   | 
|Total debt      |  |                        | 840,000 |  |      |   | 1,140,000 |      |  |   | 1,140,000 | 

364-day






















29




---



##### 

Managements Discussion and Analysis(Continued)

financial position, although if plaintiffs in these actions were
to prevail, the effect of any judgment or settlement could have
a material adverse impact on its consolidated financial results
in the particular reporting period in which resolved and,
depending on the size of any such judgment or settlement, a
material adverse effect on its consolidated financial position.

The Companys cash requirements in 2006 and beyond will be
primarily for the payment of dividends, repurchase of common
stock, purchases of inventory, capital expenditures and
repayment of borrowings. 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.

Aggregate Contractual Obligations

(Dollars in thousands)

|                                   |  |                        |           |        |  |        |        |        |  |         |         |  |  |   |         |  |  |   |         | 
|---------------------------------- |  | ---------------------- | --------- | ------ |  | ------ | ------ | ------ |  | ------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |           | Less   |  |        |        | More  
|                                   |  |                        |           | Than   |  | 1 to 3 |        | 3 to 5 |  | Than   
|                                   |  | Total                  |           | 1 Year |  | Years  |        | Years  |  | 5 Years
|                                   |  |                       
|Contractual
    Obligations        |  |                        |           |        |  |        |        |        |  |         |         |  |  |   |         |  |  |   |         | 
|Long-term debt                     |  | $                      | 840,000   |        |  | $      |       |        |  | $       |        |  |  | $ | 240,000 |  |  | $ | 600,000 | 
|Operating leases                   |  |                        | 32,504    |        |  |        | 8,563  |        |  |         | 11,192  |  |  |   | 3,903   |  |  |   | 8,846   | 
|Unconditional purchase obligations |  |                        | 346,310   |        |  |        | 79,369 |        |  |         | 100,385 |  |  |   | 91,262  |  |  |   | 75,294  | 
|                                   |  |                       
|                                   |  | $                      | 1,218,814 |        |  | $      | 87,932 |        |  | $       | 111,577 |  |  | $ | 335,165 |  |  | $ | 684,140 | 
|                                   |  |                       



Off-Balance Sheet Arrangements




Critical Accounting Policies and Estimates








30




---



##### 

10K


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

Amounts recognized in the financial statements for the
Companys noncontributory defined benefit pension plans are
determined using actuarial valuations. Inherent in these
valuations are key assumptions, including those for the expected
long-term rate of return on plan assets and the discount rate
used in calculating the applicable benefit obligation. The
Company evaluates these assumptions on an annual basis and
considers adjustments to the applicable long-term factors based
upon current market conditions, including changes in interest
rates, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 87, Employers
Accounting for Pensions. Changes in the related pension
expense may occur in the future as a result of changes in these
assumptions. Pension expense was approximately
$27.6 million, $27.8 million and $33.1 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. On average, over the past three years,
approximately 80.7 percent of pension expense was reflected
in selling, advertising and administrative expenses, while the
remainder was included in cost of products sold. The slight
decrease in pension expense for 2005 was primarily a result of
increased expected returns on a higher asset base, partially
offset by a decrease in the discount rate from 6.25 percent
to 6 percent. The Company believes the long-term rate of
return of 7.5 percent 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 5.75 percent to calculate its
pension liabilities at December 31, 2005. This rate
approximates the rate at which current pension liabilities could
effectively be settled. At December 31, 2005, unrecognized
actuarial losses, including those associated with pension plan
asset performance, were approximately $125.6 million. These
losses will be amortized over the applicable remaining service
period which is approximately 11 years. The Company made a
discretionary contribution of $11.6 million to its
qualified pension plans in 2005. The impact of a lower discount
rate, partially offset by lower actuarial losses, is expected to
result in higher pension expense for 2006. The following
provides a sensitivity analysis, which demonstrates the effects
that adverse changes in actuarial assumptions would have had on
2005 pension expense. A 50 basis point decrease in the
expected long-term rate of return on plan assets would increase
pension expense by approximately $1.4 million, while the
same basis point decrease in the discount rate would result in
an increase of approximately $4 million.

The Company maintains a number of other postretirement welfare
benefit plans which provide certain medical and life insurance
benefits to substantially all full-time employees who have
completed specified age and service requirements upon
retirement. Amounts recognized in the financial statements in
connection with these other postretirement benefit plans are
determined utilizing actuarial valuations. The key assumptions
inherent in these valuations include health care cost trend
rates and the discount rate used in calculating the applicable
postretirement benefit obligation, each of which are evaluated
by the Company on an annual basis. Future changes in the related
postretirement benefit expense may be impacted by changes in
these assumptions. The Company used a discount rate of
5.75 percent to calculate its postretirement benefit
obligation at December 31, 2005, which approximates the
rate at which current postretirement benefit liabilities could
effectively be settled. The health care cost trend increase used
in calculating the postretirement benefit obligation at
December 31, 2005 is assumed to be 9 percent in 2006
and is expected to decrease gradually to 4.5 percent by
2013 and remain level thereafter. A sensitivity analysis
demonstrating the impact that a 100 basis point increase or
decrease in these rates would have on both the postretirement
benefit obligation and the related expense is disclosed in the
Employee Benefit and Compensation Plans note to the Consolidated
Financial Statements. Expense related to these plans was
approximately $9 million, $5.6 million and
$2.9 million for the years ended December 31, 2005,
2004 and 2003, respectively.

The Companys primary business, which is the manufacture
and sale of moist smokeless tobacco, sells products with
freshness dates. It is the Companys policy to accept sales
returns from its customers for products that have exceeded such
dates. The Companys assumptions regarding sales return
accruals are based on historical experience, current sales
trends and other factors, and there has not been a significant
fluctuation between assumptions and actual return activity on a
historical basis. Actual sales returns represented approximately
5.6 percent, 5 percent and 4.1 percent of annual
moist smokeless tobacco can gross





31



---



##### 

Managements Discussion and Analysis(Continued)

sales for the years ended December 31, 2005, 2004 and 2003,
respectively. The increase in returned goods as a percentage of
gross sales over the past three years was predominantly due to
the growth of new products, including line extensions, which
tend to have higher levels of returns than well-established,
core brands. Significant changes in moist smokeless tobacco can
sales, promotional activities, new product introductions,
product quality issues and competition could affect sales
returns in the future. Accrued sales returns at
December 31, 2005 and 2004 totaled $15.9 million and
$15.8 million, respectively.

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

The Companys income tax provision takes into consideration
pretax income, statutory tax rates and the Companys tax
profile in the various jurisdictions in which it operates. The
tax bases of the Companys assets and liabilities reflect
its best estimate of the future tax benefit and costs it expects
to realize when such amounts are included in its tax returns.
Quantitative and probability analysis, which incorporates
managements judgment, is required in determining the
Companys effective tax rate and in evaluating its tax
positions. Notwithstanding the fact that all of the
Companys tax filing positions are supported by the
requisite tax and legal authority, accruals are established in
accordance with SFAS No. 5, Contingencies, when
the Company believes that these positions are likely to be
subject to challenge by a tax authority. The Internal Revenue
Service and other tax authorities audit the Companys
income tax returns on a continuous basis. Depending on the tax
jurisdiction, a number of years may elapse before a particular
matter for which the Company has established an accrual is
audited and ultimately resolved. While it is often difficult to
predict the timing of tax audits and their final outcome, the
Company believes that its accruals reflect the probable outcome
of known tax contingencies. However, the final resolution of any
such tax audits could result in either a reduction in the
Companys accruals or an increase in its income tax
provision, both of which could have a significant impact on the
results of operations in any given period. The Company
continually and regularly evaluates, assesses and adjusts these
accruals in light of changing facts and circumstances, which
could cause the effective tax rate to fluctuate from period to
period.

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

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

Cautionary Statement Regarding Forward-Looking Information

The disclosure and analysis in this report, as well as in other
reports filed with or furnished to the SEC or statements made by
the Company, may contain forward-looking statements that
describe the Companys current expectations or forecasts of
future events. One can usually identify these statements by the
fact that they do not relate strictly to historical or current
facts. Forward-looking statements often include words such as
anticipate, estimate,
expect, project, intend,
plan, believe and other similar words or
terms in connection with any discussion of future operating or
financial performance. These include statements relating to
future actions, performance or results related to current or
future products or product approvals, sales efforts, expenses,
the outcome of contingencies such as legal proceedings and
financial results. From time to time, the Company may provide
oral or written forward-looking statements in other public
materials.





32



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##### 

10K


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 risks
and uncertainties include uncertainties associated with:


    ongoing and future litigation relating to product liability,
    antitrust and other matters and legal and other regulatory
    initiatives;
    federal and state legislation, including actual and potential
    excise tax increases, and marketing restrictions relating to
    matters such as adult sampling, minimum age of purchase, self
    service displays and flavors;
    competition from other companies, including any new entrants
    into the marketplace;
    wholesaler ordering patterns;
    consumer preferences, including those relating to premium and
    price value brands and receptiveness to new product
    introductions and marketing and other promotional programs;
    the cost of tobacco leaf and other raw materials;
    conditions in capital markets; and
    other factors described in the Companys annual reports on
    Form 10-K,
    quarterly reports on
    Form 10-Q and
    current reports on
    Form 8-K to the
    Securities and Exchange Commission (SEC).Furthermore, 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. The Company undertakes no obligation to update or
revise any forward-looking statement, whether as a result of new
information, future events or otherwise. However, the public is
advised to review any future disclosures the Company makes on
related subjects in its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, and
current reports on
Form 8-K to the
SEC.





Item 7A  Quantitative and Qualitative
Disclosures About Market Risk

Interest Rate Risk

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, 2005 and 2004, the Company had
$800 million and $1.1 billion, respectively, in fixed
rate senior notes and $40 million in floating rate senior
notes outstanding. The fixed rate senior notes outstanding at
December 31, 2005 were comprised of long-term notes of
$600 million with an interest rate of 6.625 percent
and $200 million at 7.25 percent. The 2004 balance
included these two issues plus senior notes of $300 million
with an interest rate of 8.8 percent, which were designated
as current on the December 31, 2004 Consolidated Statement
of Financial Position. These $300 million senior notes were
paid, upon maturity, in March 2005. 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 fair value of the Companys fixed rate senior notes at
December 31, 2005 was $830.4 million, reflecting the
application of current interest rates offered for debt with
similar terms and maturities. This fair value is subject to
fluctuations resulting from changes in the applicable market
interest rates. The following





33



---



##### 

Managements Discussion and Analysis(Continued)

provides a sensitivity analysis of interest rate risk and the
effects of hypothetical sudden changes in the applicable market
conditions on this fair value, based upon 2005 year-end
positions. Computations of the potential effects of the
hypothetical market changes are based upon various assumptions,
involving interest rate changes, keeping all other variables
constant. Based upon an immediate 100 basis point increase
in the applicable interest rate at December 31, 2005, the
fair value of the Companys fixed rate senior notes would
decrease by approximately $38 million. Conversely, a
100 basis point decrease in that rate would increase the
fair value of these notes by $40.3 million.

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

Taking into account the Companys floating rate senior
notes payable and interest rate swap outstanding at
December 31, 2005, each 100 basis point increase or
decrease in the applicable market rates of interest, with all
other variables held constant, would not have any effect on
interest expense. This is due to the full correlation of the
terms of the notes with those of the swap, which results in
interest rates on all debt outstanding being fixed at
December 31, 2005.

Foreign Currency Risk

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 forecasted transactions to
purchase oak barrels for its wine operations and firm
commitments to purchase certain equipment for its tobacco
operations. There were several foreign currency forward
contracts outstanding at December 31, 2005, from which the
net accumulated derivative loss, included in accumulated other
comprehensive loss, was immaterial.

Concentration of Credit Risk

The Company routinely invests portions of its cash in short-term
instruments deemed to be cash equivalents. 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 issuer companies and securities, reduce the
Companys exposure to investment risk associated with these
securities. At December 31, 2005, the Company had
approximately $168.5 million invested in these instruments.

Short-term investments at December 31, 2005 of
$10 million were comprised of ARS, which are long-term
variable (floating) rate bonds that are tied to short-term
interest rates. The stated maturities for these securities are
generally 20 to 30 years, but their floating interest rates
are reset at seven, 28- or
35-day intervals via a
Dutch Auction process. Given the fact that ARS are floating rate
investments, they are typically traded at par value, with
interest paid at each auction.

Commodity Price Risk

The Company has entered into unconditional purchase obligations
in the form of contractual commitments to purchase leaf tobacco
for use in manufacturing smokeless tobacco products and grapes
and bulk wine for use in producing wine. See Aggregate
Contractual Obligations on page 30 for additional
details.





34



---



##### 

10K






Item 8  Financial Statements and
Supplementary Data

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated statement of
financial position of UST Inc. as of December 31, 2005 and
2004, and the related consolidated statements of operations,
cash flows and changes in stockholders equity
(deficit) for each of the three years in the period ended
December 31, 2005. Our audits also included the financial
statement schedule listed on Schedule II in Item 15.
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of UST Inc. at December 31, 2005 and
2004, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of UST Inc.s internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 23, 2006
expressed an unqualified opinion thereon.

LOGO



Stamford, Connecticut

February 23, 2006





35



---



##### 

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that UST Inc. maintained effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). UST Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.

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

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

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

In our opinion, managements assessment that UST Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, UST
Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005
based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statement of financial position of UST Inc. as of
December 31, 2005 and 2004 and the related consolidated
statements of operations, cash flows and changes in
stockholders equity (deficit) for each of the three
years in the period ended December 31, 2005 of UST Inc. and
our report dated February 23, 2006 expressed an unqualified
opinion thereon.

LOGO



Stamford, Connecticut

February 23, 2006





36



---



##### 

10K


UST INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

|                                                                    |                                             |                              |           |         |         |   |           |         |         |   |           |         |           | 
|------------------------------------------------------------------- | ------------------------------------------- | ---------------------------- | --------- | ------- | ------- | - | --------- | ------- | ------- | - | --------- | ------- | --------- | 
|                                                                    |                                             | Year Ended December 31       |          
|                                                                    |                                             |                              |          
|                                                                    |                                             | 2005                         |           |         | 2004    |   |           | 2003    |        
|                                                                    |                                             |                              |          
|Net sales                                                           |                                             | $                            | 1,851,885 |         |         | $ | 1,838,238 |         |         | $ | 1,731,862 |        
|Costs and expenses                                                  |                                             |                              |           |         |         |   |           |         |         |   |           |        
|                                                                    | Cost of products sold                       |                              |           | 392,670 |         |   |           | 363,357 |         |   |           | 340,654 |          
|                                                                    | Excise taxes                                |                              |           | 50,461  |         |   |           | 49,284  |         |   |           | 43,833  |          
|                                                                    | Selling, advertising and
    administrative |                              |           | 518,797 |         |   |           | 513,570 |         |   |           | 470,740 |          
|                                                                    | Antitrust litigation                        |                              |           | 11,762  |         |   |           | (582    | )       |   |           | 280,000 |          
|                                                                    |                                             |                             
|                                                                    |                                             | Total costs and
    expenses |           |         | 973,690 |   |           |         | 925,629 |   |           |         | 1,135,227 | 
|                                                                    |                                             |                             
|Operating income                                                    |                                             |                              | 878,195   |         |         |   | 912,609   |         |         |   | 596,635   |        
|                                                                    |                                             |                             
|Interest, net                                                       |                                             |                              | 50,578    |         |         |   | 75,019    |         |         |   | 76,905    |        
|                                                                    |                                             |                             
|Earnings from continuing
    operations before income taxes         |                                             |                              | 827,617   |         |         |   | 837,590   |         |         |   | 519,730   |        
|                                                                    |                                             |                             
|Income tax expense                                                  |                                             |                              | 293,349   |         |         |   | 299,538   |         |         |   | 197,681   |        
|                                                                    |                                             |                             
|Earnings from continuing
    operations                             |                                             |                              | 534,268   |         |         |   | 538,052   |         |         |   | 322,049   |        
|                                                                    |                                             |                             
|Loss from discontinued
    operations (including income tax effect) |                                             |                              |          |         |         |   | (7,215    | )       |         |   | (3,260    | )      
|                                                                    |                                             |                             
|Net earnings                                                        |                                             | $                            | 534,268   |         |         | $ | 530,837   |         |         | $ | 318,789   |        
|                                                                    |                                             |                             
|Net earnings per basic
    share:                                   |                                             |                              |           |         |         |   |           |         |         |   |           |        
|                                                                    | Earnings from continuing operations         |                              |           | $3.26   |         |   |           | $3.26   |         |   |           | $1.93   |          
|                                                                    | Loss from discontinued operations           |                              |           |        |         |   |           | (.05    | )       |   |           | (.02    | )        
|                                                                    |                                             |                             
|Net earnings per basic
    share                                    |                                             |                              | $3.26     |         |         |   | $3.21     |         |         |   | $1.91     |        
|                                                                    |                                             |                             
|Net earnings per diluted
    share:                                 |                                             |                              |           |         |         |   |           |         |         |   |           |        
|                                                                    | Earnings from continuing operations         |                              |           | $3.23   |         |   |           | $3.23   |         |   |           | $1.92   |          
|                                                                    | Loss from discontinued operations           |                              |           |        |         |   |           | (.04    | )       |   |           | (.02    | )        
|                                                                    |                                             |                             
|Net earnings per diluted
    share                                  |                                             |                              | $3.23     |         |         |   | $3.19     |         |         |   | $1.90     |        
|                                                                    |                                             |                             
|Average number of
    shares                                        |                                             |                              |           |         |         |   |           |         |         |   |           |        
|                                                                    | Basic                                       |                              |           | 163,949 |         |   |           | 165,164 |         |   |           | 166,572 |          
|                                                                    | Diluted                                     |                              |           | 165,497 |         |   |           | 166,622 |         |   |           | 167,376 |          

The accompanying notes are integral to the Consolidated
Financial Statements.






37




---



##### 

UST INC.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(In thousands)

|                                                |                                               |                                                |           |           |           |  |           |           |           | 
|----------------------------------------------- | --------------------------------------------- | ---------------------------------------------- | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                                |                                               | December 31                                    |          
|                                                |                                               |                                                |          
|                                                |                                               | 2005                                           |           |           | 2004      | 
|                                                |                                               |                                                |          
|Assets                                          |                                               |                                                |           |           |           |  |           |          
|Current assets                                  |                                               |                                                |           |           |           |  |           |          
|                                                | Cash and cash equivalents                     |                                                | $         | 202,025   |           |  | $         | 450,202   |          
|                                                | Short-term investments                        |                                                |           | 10,000    |           |  |           | 60,000    |          
|                                                | Accounts receivable                           |                                                |           | 54,186    |           |  |           | 41,462    |          
|                                                | Inventories                                   |                                                |           | 583,407   |           |  |           | 567,160   |          
|                                                | Deferred income taxes                         |                                                |           | 11,622    |           |  |           | 29,597    |          
|                                                | Income taxes receivable                       |                                                |           | 2,400     |           |  |           |          |          
|                                                | Assets held for sale                          |                                                |           | 3,433     |           |  |           |          |          
|                                                | Prepaid expenses and other current
    assets |                                                |           | 22,481    |           |  |           | 24,712    |          
|                                                |                                               |                                               
|                                                |                                               | Total current assets                           |           |           | 889,554   |  |           |           | 1,173,133 | 
|                                                |                                               |                                               
|Property, plant and equipment,
    net          |                                               |                                                | 431,168   |           |           |  | 421,848   |          
|Other assets                                    |                                               |                                                | 46,261    |           |           |  | 64,502    |          
|                                                |                                               |                                               
|                                                |                                               | Total assets                                   |           | $         | 1,366,983 |  |           | $         | 1,659,483 | 
|                                                |                                               |                                               
|Liabilities and
    Stockholders Equity        |                                               |                                                |           |           |           |  |           |          
|Current liabilities                             |                                               |                                                |           |           |           |  |           |          
|                                                | Current portion of long-term debt             |                                                | $         |          |           |  | $         | 300,000   |          
|                                                | Accounts payable and accrued
    expenses     |                                                |           | 231,061   |           |  |           | 226,281   |          
|                                                | Income taxes payable                          |                                                |           | 12,566    |           |  |           | 66,003    |          
|                                                | Litigation liability                          |                                                |           | 15,151    |           |  |           | 26,589    |          
|                                                |                                               |                                               
|                                                |                                               | Total current
    liabilities                  |           |           | 258,778   |  |           |           | 618,873   | 
|                                                |                                               |                                               
|Long-term debt                                  |                                               |                                                | 840,000   |           |           |  | 840,000   |          
|Postretirement benefits other
    than pensions |                                               |                                                | 85,819    |           |           |  | 81,874    |          
|Pensions                                        |                                               |                                                | 92,159    |           |           |  | 95,052    |          
|Deferred income taxes                           |                                               |                                                | 11,972    |           |           |  | 9,645     |          
|Other liabilities                               |                                               |                                                | 3,157     |           |           |  | 4,474     |          
|Contingencies (see
    note)                    |                                               |                                                |          |           |           |  |          |          
|                                                |                                               |                                               
|                                                |                                               | Total liabilities                              |           |           | 1,291,885 |  |           |           | 1,649,918 | 
|                                                |                                               |                                               
|Stockholders
    equity                        |                                               |                                                |           |           |           |  |           |          
|                                                | Capital
    stock(1)                          |                                                |           | 103,810   |           |  |           | 105,777   |          
|                                                | Additional paid-in capital                    |                                                |           | 945,466   |           |  |           | 885,049   |          
|                                                | Retained earnings                             |                                                |           | 497,389   |           |  |           | 492,800   |          
|                                                | Accumulated other comprehensive loss          |                                                |           | (17,802   | )         |  |           | (19,911   | )        
|                                                |                                               |                                               
|                                                |                                               |                                                | 1,528,863 |           |           |  | 1,463,715 |          
|                                                | Less treasury
    stock(2)                    |                                                |           | 1,453,765 |           |  |           | 1,454,150 |          
|                                                |                                               |                                               
|                                                |                                               | Total stockholders
    equity                 |           |           | 75,098    |  |           |           | 9,565     | 
|                                                |                                               |                                               
|                                                |                                               | Total liabilities and
    stockholders equity |           | $         | 1,366,983 |  |           | $         | 1,659,483 | 
|                                                |                                               |                                               






|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Common Stock par value $.50 per share:
    Authorized  600 million shares;
    Issued  207,620,439 shares in 2005 and
    211,554,946 shares in 2004. Preferred Stock par value
    $.10 per share: Authorized  10 million
    shares; Issued  None.
|   
|(2) | 45,049,378 shares and 46,948,011 shares of treasury
    stock at December 31, 2005 and December 31, 2004,
    respectively.                                                                                                                             

The accompanying notes are integral to the Consolidated
Financial Statements.






38




---



##### 

10K


UST INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

|                                                     |                                                                                                   |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |           |         |          |          |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | -------- | -------- | ------- | -------- | -------- | --------- | ------- | -------- | -------- | -
|                                                     |                                                                                                   | Year Ended December 31                                   |                                                                       
|                                                     |                                                                                                   |                                                          |                                                                       
|                                                     |                                                                                                   | 2005                                                     |                                                                        |                                                         | 2004    |         |          | 2003     |        
|                                                     |                                                                                                   |                                                          |                                                                       
|Operating Activities                                 |                                                                                                   |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |          
|                                                     | Net earnings                                                                                      |                                                          | $                                                                      | 534,268                                                 |         |         | $        | 530,837  |         |          | $        | 318,789   |        
|                                                     | Adjustments to reconcile net
    earnings to net cash provided by (used in) operating activities: |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |           |        
|                                                     |                                                                                                   | Depreciation and amortization                            |                                                                        |                                                         | 46,438  |         |          |          | 47,647  |          |          |           | 41,583  |         
|                                                     |                                                                                                   | Stock-based compensation expense                         |                                                                        |                                                         | 5,976   |         |          |          | 3,181   |          |          |           | 117     |         
|                                                     |                                                                                                   | Goodwill and intangible impairment                       |                                                                        |                                                         | 3,313   |         |          |          |        |          |          |           |        |         
|                                                     |                                                                                                   | Loss on disposition of property,
    plant and equipment |                                                                        |                                                         | 8,911   |         |          |          | 2,946   |          |          |           | 2,076   |         
|                                                     |                                                                                                   | Deferred income taxes                                    |                                                                        |                                                         | 19,167  |         |          |          | 100,767 |          |          |           | (79,490 | )       
|                                                     |                                                                                                   | Changes in operating assets and
    liabilities:         |                                                                        |                                                         |         |         |          |          |         |          |          |           |         |         
|                                                     |                                                                                                   |                                                          | Accounts receivable                                                    |                                                         |         | (12,724 | )        |          |         | 25,951   |          |           |         | 9,387    |         
|                                                     |                                                                                                   |                                                          | Inventories                                                            |                                                         |         | (16,247 | )        |          |         | (22,780  | )        |           |         | (37,630  | )       
|                                                     |                                                                                                   |                                                          | Prepaid expenses and other assets                                      |                                                         |         | 16,255  |          |          |         | 13,573   |          |           |         | (52,191  | )       
|                                                     |                                                                                                   |                                                          | Accounts payable, accrued expenses,
    pensions and other liabilities |                                                         |         | 6,757   |          |          |         | 51,172   |          |           |         | 29,612   |         
|                                                     |                                                                                                   |                                                          | Tax benefits from the exercise of
    stock options                    |                                                         |         | 15,860  |          |          |         | 17,070   |          |           |         | 8,535    |         
|                                                     |                                                                                                   |                                                          | Income taxes                                                           |                                                         |         | (55,837 | )        |          |         | 10,848   |          |           |         | 36,870   |         
|                                                     |                                                                                                   |                                                          | Litigation liability                                                   |                                                         |         | (11,438 | )        |          |         | (215,797 | )        |           |         | (980,510 | )       
|                                                     |                                                                                                   |                                                         
|                                                     |                                                                                                   |                                                          |                                                                        | Net cash provided by (used in)
    operating activities |         |         | 560,699  |          |         |          | 565,415  |           |         |          | (702,852 | )
|                                                     |                                                                                                   |                                                         
|Investing Activities                                 |                                                                                                   |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |          
|                                                     | Short-term investments, net                                                                       |                                                          |                                                                        | 50,000                                                  |         |         |          | (55,000  | )       |          |          | (5,000    | )      
|                                                     | Purchases of property, plant and
    equipment                                                    |                                                          |                                                                        | (89,947                                                 | )       |         |          | (70,326  | )       |          |          | (48,944   | )      
|                                                     | Dispositions of property, plant and
    equipment                                                 |                                                          |                                                                        | 22,942                                                  |         |         |          | 6,956    |         |          |          | 197       |        
|                                                     |                                                                                                   |                                                         
|                                                     |                                                                                                   |                                                          |                                                                        | Net cash used in investing
    activities               |         |         | (17,005  | )        |         |          | (118,370 | )         |         |          | (53,747  | )
|                                                     |                                                                                                   |                                                         
|Financing Activities                                 |                                                                                                   |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |          
|                                                     | Repayment of debt                                                                                 |                                                          |                                                                        | (300,000                                                | )       |         |          |         |         |          |          |          |        
|                                                     | Withdrawals from restricted deposits                                                              |                                                          |                                                                        |                                                        |         |         |          |         |         |          |          | 1,242,431 |        
|                                                     | Proceeds from the issuance of stock                                                               |                                                          |                                                                        | 69,375                                                  |         |         |          | 114,276  |         |          |          | 48,286    |        
|                                                     | Dividends paid                                                                                    |                                                          |                                                                        | (361,208                                                | )       |         |          | (344,128 | )       |          |          | (332,986  | )      
|                                                     | Stock repurchased                                                                                 |                                                          |                                                                        | (200,038                                                | )       |         |          | (200,031 | )       |          |          | (150,095  | )      
|                                                     |                                                                                                   |                                                         
|                                                     |                                                                                                   |                                                          |                                                                        | Net cash (used in) provided by
    financing activities |         |         | (791,871 | )        |         |          | (429,883 | )         |         |          | 807,636  |  
|                                                     |                                                                                                   |                                                         
|                                                     |                                                                                                   |                                                          |                                                                        | (Decrease) increase in cash and
    cash equivalents    |         |         | (248,177 | )        |         |          | 17,162   |           |         |          | 51,037   |  
|                                                     |                                                                                                   |                                                          |                                                                        | Cash and cash equivalents at
    beginning of year      |         |         | 450,202  |          |         |          | 433,040  |           |         |          | 382,003  |  
|                                                     |                                                                                                   |                                                         
|                                                     |                                                                                                   |                                                          |                                                                        | Cash and cash equivalents at end
    of year            |         | $       | 202,025  |          |         | $        | 450,202  |           |         | $        | 433,040  |  
|                                                     |                                                                                                   |                                                         
|Supplemental disclosure of cash
    flow information |                                                                                                   |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |          
|                                                     | Cash paid during the year for:                                                                    |                                                          |                                                                        |                                                         |         |         |          |          |         |          |          |           |        
|                                                     |                                                                                                   | Income taxes                                             |                                                                        | $                                                       | 314,735 |         |          | $        | 175,972 |          |          | $         | 255,043 |         
|                                                     |                                                                                                   | Interest                                                 |                                                                        |                                                         | 70,351  |         |          |          | 83,551  |          |          |           | 83,553  |         

The accompanying notes are integral to the Consolidated
Financial Statements.






39




---



##### 

UST INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

(Dollars in thousands, except per share amounts)

|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------ | ------- | ---------- | ------- | - | ------- | ----------- | ----- | - | ------------- | - | ----- | ------------- | ------- | ------ | --------- | - | ---------- | ------------- |  | - | -------- | ------ | - | - | ------- | ------ | -
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         | Accumulated |       |   |               |   | Total |               |         |       
|                                                                                                                                                                                                   |                                             |        |         | Additional |         |   |         |             | Other |   |               |   |       | Stockholders |         |        |          
|                                                                                                                                                                                                   |                                             | Common |         |            | Paid-In |   |         | Retained    |       |   | Comprehensive |   |       | Treasury      |         |        | Equity/   |   |            | Comprehensive | 
|                                                                                                                                                                                                   |                                             | Stock  |         |            | Capital |   |         | Earnings    |       |   | Loss          |   |       | Stock         |         |        | (Deficit) |   |            | Income        | 
|                                                                                                                                                                                                   |                                             |        |        
|Balance at December 31, 2002                                                                                                                                                                       |                                             | $      | 102,720 |            |         | $ | 696,905 |             |       | $ | 320,288       |   |       | $             | (62,879 | )      |           | $ | (1,104,024 | )             |  | $ | (46,990  | )      |   |   |         |       
|Comprehensive income:                                                                                                                                                                              |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|Net earnings                                                                                                                                                                                       |                                             |        |        |            |         |   |        |             |       |   | 318,789       |   |       |               |        |        |           |   |           |               |  |   | 318,789  |        |   | $ | 318,789 |       
|Other comprehensive income, net of
    tax:                                                                                                                                                        |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   | Net deferred gain on cash flow
    hedges   |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 853    |           |   |            |              |  |   |          | 853    |   |   |         | 853    |  
|                                                                                                                                                                                                   | Foreign currency translation
    adjustment |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 1,599  |           |   |            |              |  |   |          | 1,599  |   |   |         | 1,599  |  
|                                                                                                                                                                                                   | Minimum pension liability adjustment        |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 36,969 |           |   |            |              |  |   |          | 36,969 |   |   |         | 36,969 |  
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Other comprehensive income                                                                                                                                                                         |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   | 39,421  |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Comprehensive income                                                                                                                                                                               |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   | $ | 358,210 |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Cash dividends 
    $2.00 per share                                                                                                                                                               |                                             |        |        |            |         |   |        |             |       |   | (332,986      | ) |       |               |        |        |           |   |           |               |  |   | (332,986 | )      |   |   |         |       
|Exercise of stock
    options  2,011,500 shares and issuance of
    restricted stock  49,840 shares                                                                                              |                                             |        | 1,030   |            |         |   | 43,734  |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 44,764   |        |   |   |         |       
|Income tax benefits and decrease in
    receivables from exercise of stock options                                                                                                                 |                                             |        |        |            |         |   | 11,910  |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 11,910   |        |   |   |         |       
|Stock repurchased 
    4,588,750 shares                                                                                                                                                           |                                             |        |        |            |         |   |        |             |       |   |              |   |       |               |        |        |           |   | (150,095   | )             |  |   | (150,095 | )      |   |   |         |       
|                                                                                                                                                                                                   |                                             |        |         |            |        
|Balance at December 31, 2003                                                                                                                                                                       |                                             |        | 103,750 |            |         |   | 752,549 |             |       |   | 306,091       |   |       |               | (23,458 | )      |           |   | (1,254,119 | )             |  |   | (115,187 | )      |   |   |         |       
|Comprehensive income:                                                                                                                                                                              |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|Net earnings                                                                                                                                                                                       |                                             |        |        |            |         |   |        |             |       |   | 530,837       |   |       |               |        |        |           |   |           |               |  |   | 530,837  |        |   | $ | 530,837 |       
|Other comprehensive income, net of
    tax:                                                                                                                                                        |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   | Net deferred gain on cash flow
    hedges   |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 837    |           |   |            |              |  |   |          | 837    |   |   |         | 837    |  
|                                                                                                                                                                                                   | Foreign currency translation
    adjustment |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 1,751  |           |   |            |              |  |   |          | 1,751  |   |   |         | 1,751  |  
|                                                                                                                                                                                                   | Minimum pension liability adjustment        |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 959    |           |   |            |              |  |   |          | 959    |   |   |         | 959    |  
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Other comprehensive income                                                                                                                                                                         |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   | 3,547   |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Comprehensive income                                                                                                                                                                               |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   | $ | 534,384 |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Cash dividends 
    $2.08 per share                                                                                                                                                               |                                             |        |        |            |         |   |        |             |       |   | (344,128      | ) |       |               |        |        |           |   |           |               |  |   | (344,128 | )      |   |   |         |       
|Exercise of stock
    options  3,849,000 shares and issuance of
    restricted stock  205,560 shares                                                                                             |                                             |        | 2,027   |            |         |   | 109,191 |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 111,218  |        |   |   |         |       
|Income tax benefits and decrease in
    receivables from exercise of stock options                                                                                                                 |                                             |        |        |            |         |   | 23,309  |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 23,309   |        |   |   |         |       
|Stock repurchased 
    4,939,400 shares                                                                                                                                                           |                                             |        |        |            |         |   |        |             |       |   |              |   |       |               |        |        |           |   | (200,031   | )             |  |   | (200,031 | )      |   |   |         |       
|                                                                                                                                                                                                   |                                             |        |         |            |        
|Balance at December 31, 2004                                                                                                                                                                       |                                             |        | 105,777 |            |         |   | 885,049 |             |       |   | 492,800       |   |       |               | (19,911 | )      |           |   | (1,454,150 | )             |  |   | 9,565    |        |   |   |         |       
|Comprehensive income:                                                                                                                                                                              |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|Net earnings                                                                                                                                                                                       |                                             |        |        |            |         |   |        |             |       |   | 534,268       |   |       |               |        |        |           |   |           |               |  |   | 534,268  |        |   | $ | 534,268 |       
|Other comprehensive income (loss),
    net of tax:                                                                                                                                                 |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   | Net deferred gain on cash flow
    hedges   |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 1,400  |           |   |            |              |  |   |          | 1,400  |   |   |         | 1,400  |  
|                                                                                                                                                                                                   | Foreign currency translation
    adjustment |        |         |           |         |   |         |            |       |   |               |  |       |               |         | 1,161  |           |   |            |              |  |   |          | 1,161  |   |   |         | 1,161  |  
|                                                                                                                                                                                                   | Minimum pension liability adjustment        |        |         |           |         |   |         |            |       |   |               |  |       |               |         | (452   | )         |   |            |              |  |   |          | (452   | ) |   |         | (452   | )
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Other comprehensive income                                                                                                                                                                         |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   |   | 2,109   |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Comprehensive income                                                                                                                                                                               |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               |  |   |          |        |   | $ | 536,377 |       
|                                                                                                                                                                                                   |                                             |        |         |            |         |   |         |             |       |   |               |   |       |               |         |        |           |   |            |               | 
|Cash dividends 
    $2.20 per share                                                                                                                                                               |                                             |        |        |            |         |   |        |             |       |   | (361,208      | ) |       |               |        |        |           |   |           |               |  |   | (361,208 | )      |   |   |         |       
|Exercise of stock
    options  2,179,000 shares; issuance of stock and
    restricted stock  199,409 shares; issuance of
    stock upon conversion of restricted stock units 
    24,359 shares |                                             |        | 1,202   |            |         |   | 69,779  |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 70,981   |        |   |   |         |       
|Income tax benefits and decrease in
    receivables from exercise of stock options                                                                                                                 |                                             |        |        |            |         |   | 19,421  |             |       |   |              |   |       |               |        |        |           |   |           |               |  |   | 19,421   |        |   |   |         |       
|Stock repurchased 
    4,438,642 shares                                                                                                                                                           |                                             |        |        |            |         |   |        |             |       |   |              |   |       |               |        |        |           |   | (200,038   | )             |  |   | (200,038 | )      |   |   |         |       
|Retirement of treasury
    stock  6,337,275 shares                                                                                                                                                |                                             |        | (3,169  | )          |         |   | (28,783 | )           |       |   | (168,471      | ) |       |               |        |        |           |   | 200,423    |               |  |   |         |        |   |   |         |       
|                                                                                                                                                                                                   |                                             |        |         |            |        
|Balance at December 31, 2005                                                                                                                                                                       |                                             | $      | 103,810 |            |         | $ | 945,466 |             |       | $ | 497,389       |   |       | $             | (17,802 | )      |           | $ | (1,453,765 | )             |  | $ | 75,098   |        |   |   |         |       
|                                                                                                                                                                                                   |                                             |        |         |            |        

The accompanying notes are integral to the Consolidated
Financial Statements.






40




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##### 

10K


UST INC.

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. Certain prior year amounts have been
reclassified to conform to the 2005 financial statement
presentation.

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

As a result of the transfer of the Companys cigar
operation to a smokeless tobacco competitor in 2004, pursuant to
an agreement to resolve an antitrust action, the results of this
operation are presented as Discontinued Operations for 2004 and
2003 (see Discontinued Operations note).

Revenue Recognition

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

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

Costs associated with the Companys sales incentives,
consisting of consideration offered to any purchasers of the
Companys products at any point along the distribution
chain, are recorded as a reduction to net sales on
the Consolidated Statement of Operations.

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

Cash and Cash Equivalents

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

Inventories

Inventories are stated at lower of cost or market. Elements of
cost included in products in process and finished goods
inventories include raw materials, comprised primarily of leaf
tobacco and grapes, direct labor and manufacturing overhead. The
majority of leaf tobacco costs is determined using the
last-in, first-out
(LIFO) method. The cost of the remaining inventories is
determined using the
first-in, first-out
(FIFO) and average





41



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##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Summary of Significant Accounting Policies (continued)

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.

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 costs are expensed when incurred. The
Company capitalizes interest related to capital projects that
qualify for such treatment under Statement of Financial
Accounting Standards (SFAS or Statement)
No. 34, Capitalization of Interest Costs.

Impairment of Long-Lived Assets

In accordance with Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the carrying
values of long-lived assets, including property, plant and
equipment and finite-lived intangible 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. These criteria 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 the
unlikelihood that significant changes will be made to the plan
to sell the assets. The Company measures long-lived assets to be
disposed of by sale at the lower of carrying amount or fair
value, less cost to sell.

Income Taxes

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

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

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

While it is often difficult to predict the timing of tax audits
and their final outcome, the Company believes that its accruals
reflect the probable outcome of known tax contingencies.
However, the final resolution of any





42



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##### 

10K


such tax audit could result in either a reduction in the
Companys accruals or an increase in its income tax
provision, both of which could have a significant impact on the
results of operations in any given period. The Company
continually and regularly evaluates, assesses and adjusts these
accruals in light of changing facts and circumstances, which
could cause the effective tax rate to fluctuate from period to
period.

Advertising Costs

The Company expenses the production costs of advertising in the
period in which they are incurred. Advertising expenses, which
include print and point of sale advertising and certain trade
and marketing promotions, were $72.1 million in 2005,
$79.4 million in 2004 and $72.5 million in 2003. At
December 31, 2005 and 2004, $4.3 million of
advertising-related materials were included in prepaid expenses
and other current assets.

Stock-Based Compensation

Through December 31, 2005, the Company accounted for
stock-based compensation awards to employees and
non-employee directors
in accordance with the intrinsic value-based method prescribed
by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees(APB Opinion No. 25). No stock-based
compensation expense is reflected in net earnings 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 2005 and 2004
as a result of restricted stock granted to employees and
non-employee directors
and restricted stock units granted to employees. Compensation
expense recognized in net earnings during 2005 also included
amounts related to grants of common stock to
non-employee directors.
Compensation expense recognized in net earnings during 2003
related to restricted stock granted to employees and
non-employee directors.

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

|                                                                                                                                               |             |      |         |       |      |   |         |       |  |   |         |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                                                                                               |             |      |        
|                                                                                                                                               |             | 2005 |         |       | 2004 |   |         | 2003  | 
|                                                                                                                                               |             |      |        
|Net earnings:                                                                                                                                  |             |      |         |       |      |   |         |       |  |   |         |      
|As reported                                                                                                                                    |             | $    | 534,268 |       |      | $ | 530,837 |       |  | $ | 318,789 |      
|Add: Total stock-based employee
    compensation expense included in reported net income, net of
    related tax effect                        |             |      | 3,884   |       |      |   | 2,138   |       |  |   | 76      |      
|Less: Total stock-based employee
    compensation expense determined under the fair value method for
    all awards, net of related tax effect |             |      | (8,948  | )     |      |   | (5,258  | )     |  |   | (3,848  | )    
|                                                                                                                                               |             |     
|Pro forma                                                                                                                                      |             | $    | 529,204 |       |      | $ | 527,717 |       |  | $ | 315,017 |      
|                                                                                                                                               |             |     
|Basic earnings per share:                                                                                                                      |             |      |         |       |      |   |         |       |  |   |         |      
|                                                                                                                                               | As reported |      |         | $3.26 |      |   |         | $3.21 |  |   |         | $1.91 | 
|                                                                                                                                               | Pro forma   |      |         | $3.23 |      |   |         | $3.20 |  |   |         | $1.89 | 
|Diluted earnings per share:                                                                                                                    |             |      |         |       |      |   |         |       |  |   |         |      
|                                                                                                                                               | As reported |      |         | $3.23 |      |   |         | $3.19 |  |   |         | $1.90 | 
|                                                                                                                                               | Pro forma   |      |         | $3.20 |      |   |         | $3.18 |  |   |         | $1.88 | 



Share-Based Payment






43




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##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Summary of Significant Accounting Policies (continued)

Stock-Based Compensation (continued)

grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure, as
allowed under Statement No. 123, will no longer be an
alternative. See Accounting Pronouncementsbelow for
additional details.

Certain of the stock awards granted to employees, including
options and restricted stock grants, contain a provision for the
acceleration of vesting of unvested shares upon an
employees retirement. Under Statement 123(R), for
similar awards granted subsequent to January 1, 2006, the
Company must revise its expense recognition approach to record
the cost of awards to retirement-eligible employees over the
shorter of the original awards vesting period or the
period remaining up to the employees retirement
eligibility date. The Company does not anticipate that the
retirement eligibility provision under Statement 123(R),
will have a material impact on its results of operations.
Furthermore, had the Company historically recognized stock-based
compensation cost for retirement-eligible employees under this
accelerated method, the difference in pro forma stock-based
compensation expense, net of tax, for each of the periods
presented above, would have been an increase in compensation
expense of $0.2 million and $1 million, net of tax, in
2005 and 2003, respectively, and a decrease in compensation
expense of $0.5 million, net of tax, in 2004.

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.

Net Earnings Per Share

Basic earnings per share is computed by dividing net earnings by
the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is
computed by dividing net earnings by the weighted-average number
of shares of common stock outstanding during the period,
increased to include the number of shares of common stock that
would have been outstanding had the potential dilutive shares of
common stock been issued. The dilutive effect of outstanding
options, restricted stock and restricted stock units is
reflected in diluted earnings per share by applying the treasury
stock method under SFAS No. 128, Earnings per
Share. Under the treasury stock method, an increase in the
fair value of the Companys common stock can result in a
greater dilutive effect from outstanding options, restricted
stock and restricted stock units. Furthermore, the exercise of
options and the vesting of restricted stock and restricted stock
units can result in a greater dilutive effect on earnings per
share.

As the Company recognized a fourth quarter loss in 2003 due to a
litigation settlement charge, certain potential common shares
were excluded from the full-year 2003 diluted earnings per share
calculation as they were antidilutive.

Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement No. 154, Accounting
Changes and Error Corrections  a replacement of
APB Opinion No. 20 and FASB Statement No. 3.
The pronouncement requires that all voluntary changes in
accounting principle be reported by retrospectively applying the
principle to all prior periods that are presented in the
financial statements. The Company adopted the provisions of
Statement No. 154 on January 1, 2006, as required, and
does not expect the adoption of this standard will have a
material impact on the Companys consolidated financial
statements.





44



---



##### 

10K


In December 2004, the FASB issued Statement 123(R), which
is a revision of Statement No. 123. Statement 123(R)
supersedes APB Opinion No. 25 and amends Statement
No. 95, Statement of Cash Flows. As stated above,
the approach in Statement 123(R) is similar to the approach
described in Statement 123; however, Statement 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure, as
allowed under Statement No. 123, will no longer be an
alternative. See Stock-Based Compensationabove for more
details.

In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB)
No. 107 to provide supplemental guidance in adopting
Statement No. 123(R). The bulletin provides guidance in
accounting for share-based transactions with
non-employees,
valuation methods, the classification of compensation expense,
accounting for the income tax effects of share-based payments,
and disclosures in Managements Discussion and Analysis
subsequent to the adoption of Statement No. 123(R).

In April 2005, the SEC announced the adoption of a new rule that
amends the compliance dates for Statement 123(R). The
SECs new rule allows companies to implement
Statement 123(R) at the beginning of their next fiscal
year, instead of the next reporting period, that begins after
June 15, 2005. The Company has adopted
Statement 123(R) for the period beginning January 1,
2006 using the modified prospective transition method, in which
compensation cost is recognized beginning with the effective
date based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date, and based
on the requirements of Statement 123 for all awards granted
to employees prior to the adoption date of Statement 123(R)
that remain unvested on the adoption date.

As permitted by Statement 123, prior to January 1,
2006, the Company accounted for share-based payments to
employees and non-employee directors using the intrinsic value
method prescribed in APB Opinion No. 25. The Company
grants stock options with exercise prices equal to the
respective grant dates fair market value and, as such,
recognized no compensation cost for such stock options. The
impact of adoption of Statement 123(R) on future periods
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However,
had the Company adopted Statement 123(R) in prior periods,
the impact of that standard would have approximated the impact
of Statement 123 as described in the disclosure of pro
forma net income and earnings per share in the Stock-Based
Compensationsection of the Summary of Significant
Accounting Policies note. Statement 123(R) also requires
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption.

In November 2004, the FASB issued Statement No. 151,
Inventory Costs  an amendment of
ARB No. 43, Chapter 4(Statement
No. 151). Statement No. 151 amends the guidance
in Accounting Research Bulletin No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material, or spoilage, and
requires these costs be treated as current period charges. In
addition, Statement No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. The Company
has adopted the provisions of Statement No. 151 on
January 1, 2006, as required, and does not expect the
adoption of this standard will have a material impact on the
Companys consolidated financial statements.

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.





45



---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Inventories

Inventories at December 31, 2005 and 2004, respectively,
were as follows:

|                             |  |             |         |  |      |   |         | 
|---------------------------- |  | ----------- | ------- |  | ---- | - | ------- | 
|                             |  | December 31 |        
|                             |  |             |        
|                             |  | 2005        |         |  | 2004 |  
|                             |  |             |        
|Leaf tobacco                 |  | $           | 202,553 |  |      | $ | 205,646 | 
|Products in process          |  |             | 203,396 |  |      |   | 208,935 | 
|Finished goods               |  |             | 156,343 |  |      |   | 134,662 | 
|Other materials and supplies |  |             | 21,115  |  |      |   | 17,917  | 
|                             |  |            
|                             |  | $           | 583,407 |  |      | $ | 567,160 | 
|                             |  |            





Accounting for the Impairment
or Disposal of Long-Lived Assets






|                              |  |             |         |  |      |   |         | 
|----------------------------- |  | ----------- | ------- |  | ---- | - | ------- | 
|                              |  | December 31 |        
|                              |  |             |        
|                              |  | 2005        |         |  | 2004 |  
|                              |  |             |        
|Land                          |  | $           | 18,417  |  |      | $ | 18,745  | 
|Buildings                     |  |             | 265,639 |  |      |   | 266,992 | 
|Machinery and equipment       |  |             | 525,242 |  |      |   | 515,094 | 
|                              |  |            
|                              |  |             | 809,298 |  |      |   | 800,831 | 
|Less accumulated depreciation |  |             | 378,130 |  |      |   | 378,983 | 
|                              |  |            
|                              |  | $           | 431,168 |  |      | $ | 421,848 | 
|                              |  |            







46




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##### 

10K


Commitments

Purchase Agreements

At December 31, 2005, the Company had entered into
unconditional purchase obligations in the form of contractual
commitments. Unconditional purchase obligations are commitments
that are either noncancelable or cancelable only under certain
predefined conditions.

The Company is obligated to make payments in the upcoming year
of approximately $19.1 million for leaf tobacco to be used
in the production of moist smokeless tobacco products. The
decrease from the December 31, 2004 commitment of
$21.6 million is primarily a result of the impact of
tobacco quota buyout legislation on leaf tobacco costs (see
Other Matters note).

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

|                  |  |      |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |        |       |  |   |        |  |  |   |         | 
|----------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---------- | - | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                  |  |      |       
|                  |  | 2006 |        |  | 2007 |   |        | 2008 |  |   | 2009   |  |  | 2010 |        |  | Thereafter |   |        | Total | 
|                  |  |      |       
|Grape commitments |  | $    | 60,237 |  |      | $ | 51,804 |      |  | $ | 48,581 |  |  | $    | 47,322 |  |            | $ | 43,940 |       |  | $ | 75,294 |  |  | $ | 327,178 | 



Operating Leases




|                  |  |      |       |  |      |   |       |      |  |   |       |  |  |      |       |  |            |   |       |       |  |   |       |  |  |   |        | 
|----------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | ---------- | - | ----- | ----- |  | - | ----- |  |  | - | ------ | 
|                  |  |      |      
|                  |  | 2006 |       |  | 2007 |   |       | 2008 |  |   | 2009  |  |  | 2010 |       |  | Thereafter |   |       | Total | 
|                  |  |      |      
|Lease commitments |  | $    | 8,199 |  |      | $ | 6,564 |      |  | $ | 4,628 |  |  | $    | 2,881 |  |            | $ | 1,022 |       |  | $ | 8,846 |  |  | $ | 32,140 | 











|                       |  |             |        |  |      |   |        | 
|---------------------- |  | ----------- | ------ |  | ---- | - | ------ | 
|                       |  | December 31 |       
|                       |  |             |       
|                       |  | 2005        |        |  | 2004 |  
|                       |  |             |       
|Prepaid pension costs  |  | $           | 32,422 |  |      | $ | 46,295 | 
|Capitalized debt costs |  |             | 4,343  |  |      |   | 5,440  | 
|Goodwill               |  |             | 2,649  |  |      |   | 4,944  | 
|Other                  |  |             | 6,847  |  |      |   | 7,823  | 
|                       |  |            
|                       |  | $           | 46,261 |  |      | $ | 64,502 | 
|                       |  |            



Goodwill and Other Intangible
Assets






47




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Other Assets (continued)

recorded an impairment charge of approximately $2.4 million
related to goodwill for F.W. Rickard Seeds, Inc., a
second-tier subsidiary included in the Smokeless Tobacco
segment. This testing included consideration of the recent
deterioration in sales trends, as well as the future
expectations for the seed business and industry. The fair value
of the entity, which was used in computing the impairment
charge, was calculated based upon both comparable market
multiples and discounted expected cash flows. There were no
goodwill impairment charges recognized in 2004 or 2003.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2005
and 2004, respectively, consisted of the following:

|                                                 |  |             |         |  |      |   |         | 
|------------------------------------------------ |  | ----------- | ------- |  | ---- | - | ------- | 
|                                                 |  | December 31 |        
|                                                 |  |             |        
|                                                 |  | 2005        |         |  | 2004 |  
|                                                 |  |             |        
|Trade accounts payable                           |  | $           | 78,947  |  |      | $ | 71,529  | 
|Employee compensation and benefits               |  |             | 61,340  |  |      |   | 64,688  | 
|Interest payable on debt                         |  |             | 19,669  |  |      |   | 27,369  | 
|Smokeless tobacco
    settlement-related charges |  |             | 17,997  |  |      |   | 13,555  | 
|Returned goods accrual                           |  |             | 15,852  |  |      |   | 15,785  | 
|Other accrued expenses                           |  |             | 37,256  |  |      |   | 33,355  | 
|                                                 |  |            
|                                                 |  | $           | 231,061 |  |      | $ | 226,281 | 
|                                                 |  |            





|                                     |  |             |         |  |          |   |         |          |  |   |           |  |  |   |           | 
|------------------------------------ |  | ----------- | ------- |  | -------- | - | ------- | -------- |  | - | --------- |  |  | - | --------- | 
|                                     |  | December 31 |        
|                                     |  |             |        
|                                     |  | 2005        |         |  | 2004     |  
|                                     |  | Carrying    |         |  | Fair     |   |         | Carrying |  |   | Fair      | 
|                                     |  | Value       |         |  | Value(1) |   |         | Value    |  |   | Value(1)  | 
|                                     |  |             |        
|Current portion of long-term debt:   |  |             |         |  |          |   |         |          |  |   |           |  |  |   |           | 
|Senior notes, due March 15,
    2005 |  | $           |        |  |          | $ |        |          |  | $ | 300,000   |  |  | $ | 303,510   | 
|                                     |  |            
|Long-term debt:                      |  |             |         |  |          |   |         |          |  |   |           |  |  |   |           | 
|Senior notes, due June 1, 2009       |  |             | 240,000 |  |          |   | 248,960 |          |  |   | 240,000   |  |  |   | 264,220   | 
|Senior notes, due July 15, 2012      |  |             | 600,000 |  |          |   | 621,480 |          |  |   | 600,000   |  |  |   | 673,800   | 
|                                     |  |            
|                                     |  |             | 840,000 |  |          |   | 870,440 |          |  |   | 840,000   |  |  |   | 938,020   | 
|                                     |  |            
|                                     |  | $           | 840,000 |  |          | $ | 870,440 |          |  | $ | 1,140,000 |  |  | $ | 1,241,530 | 
|                                     |  |            






|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The fair value of the Companys long-term debt is estimated
    based upon the application of current interest rates offered for
    debt with similar terms and maturities.

364-day






48




---



##### 

10K


institutions that are parties therein. The Company had no direct
borrowings under either credit facility or commercial paper
borrowings at December 31, 2005 or 2004.

Costs of approximately $0.9 million associated with the
establishment of the New Credit Facility were capitalized in
2004 and are being amortized over the applicable term.
Approximately $0.3 million and $0.2 million of these
costs have been recognized for the year ended December 31,
2005 and 2004, respectively. Approximately $0.7 million of
origination costs, capitalized in 2002 associated with the
Credit Facility, was recognized for the year ended
December 31, 2004. The New Credit Facility requires the
maintenance of certain financial ratios, the payment of
commitment and administrative fees and includes affirmative and
negative covenants customary for facilities of this type. The
commitment fee payable on the unused portion of the New Credit
Facility is determined based on an interest rate, within a range
of rates, dependent upon the Companys senior unsecured
debt rating. The commitment fee currently payable is
..15 percent per annum. Commitment fees incurred for the New
Credit Facility approximated $0.5 million and
$0.2 million for the years ended December 31, 2005 and
2004, respectively. Commitment fees incurred for the Credit
Facility approximated $0.5 million and $0.9 million
for the years ended December 31, 2004 and 2003,
respectively. As of December 31, 2005, the Company was in
compliance with all covenants under the terms of the New Credit
Facility.

In July 2002, the Company issued $600 million aggregate
principal amount of 6.625 percent senior notes at a price
of 99.53 percent of the principal amount. These notes
mature on July 15, 2012, with interest payable
semiannually. Approximately $4.8 million of the costs
associated with the issuance of the notes were capitalized and
are being amortized over the term of the notes. Approximately
$0.5 million of these costs have been recognized in each of
the three years ended December 31, 2005, 2004 and 2003. The
Company used a portion of the net proceeds from the
$600 million senior notes to pay the remaining principal,
fees and prepayment penalties associated with the
$1 billion financing arrangement in the amount of
$325.8 million, which was deposited with the
U.S. District Court to satisfy the bonding requirement for
certain antitrust litigation (see Other Matters note).

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

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

Derivative Instruments and Hedging Activities

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

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

All derivatives are recognized as either assets or liabilities
in the Consolidated Statement of Financial Position with
measurement at fair value, and changes in the fair values of
derivative instruments are reported in either net earnings or
other comprehensive income depending on the designated use of
the derivative and whether it meets the criteria for hedge
accounting. The accounting for gains and losses associated with





49



---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Derivative Instruments and Hedging Activities (continued)

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 an
effective cash flow hedge, whereby 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, 2005 and
2004 was a net liability of $1.9 million and
$4 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, 2005 and 2004 included the accumulated loss on
the cash flow hedge (net of taxes) of $1.2 million and
$2.6 million, respectively. This reflects $1.4 million
and $0.8 million (net of taxes) of other comprehensive
income recognized for the year ended December 31, 2005 and
2004, respectively, in connection with the change in fair value
of the swap.

In addition, the Company has entered into foreign currency
forward contracts, designated as effective cash flow hedges, in
order to hedge the risk of variability in cash flows associated
with foreign currency payments required in connection with
forecasted transactions and firm commitments to purchase oak
barrels for its wine operations and certain equipment for its
tobacco operations. There were several of such foreign currency
forward contracts outstanding at December 31, 2005, from
which the net accumulated derivative loss, included in
accumulated other comprehensive loss, was immaterial.

Other derivative contracts at December 31, 2005 included
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 the
accounting and reporting requirements under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities.

Capital Stock

The Company has two classes of capital stock: preferred stock,
with a par value of $.10 per share, and common stock, with
a par value of $.50 per share. Authorized preferred stock
is 10 million shares and authorized common stock is
600 million shares. There have been no shares of the
Companys preferred stock issued. Events causing changes in
the issued and outstanding shares of common stock are described
in the Consolidated Statement of Changes in Stockholders
Equity (Deficit).

Common stock issued at December 31, 2005 and 2004 was
207,620,439 shares and 211,554,946 shares,
respectively. Treasury shares held at December 31, 2005 and
2004 were 45,049,378 shares and 46,948,011 shares,
respectively.

The Company repurchased a total of 4.4 million shares and
4.9 million shares during 2005 and 2004, respectively, at a
cost of $200 million each year. Of these totals, the
Company repurchased 64,000 shares and 0.3 million
shares in 2005 and 2004, respectively, at prevailing market
prices directly from the trust established for the
Companys defined benefit pension plans. Of the total
shares repurchased in 2005, 1,651,989 shares were
repurchased pursuant to the Companys authorized program,
approved in October 1999, to repurchase its outstanding common
stock up to a maximum of 20 million shares. Repurchases
under this program resulted in a total cost of
$646.2 million. In December 2004, the Companys Board
of Directors authorized a new program under which the Company
may repurchase up to 20 million additional shares of its
outstanding common stock. Through December 31, 2005,
2,786,653 shares have been repurchased at a cost of
approximately $117 million under the new program.





50



---



##### 

10K


In May 2005, the Company authorized that 10 million shares
of its common stock be reserved for issuance under the 2005 Long
Term Incentive Plan (2005 LTIP), which was
approved by stockholders at the Companys Annual Meeting on
May 3, 2005. Of the total shares reserved, 6.3 million
shares of the Companys treasury stock were retired for
this purpose. The remaining 3.7 million shares, which had
been retired in previous years from the Companys treasury
stock, in connection with the establishment of the UST Inc.
Amended and Restated Stock Incentive Plan, the Nonemployee
Directors Stock Option Plan and the Nonemployee
Directors Restricted Stock Award Plan, are available for
issuance under the 2005 LTIP (See Stock-Based Compensation
note for details on awards made under this plan).

Stock-Based Compensation

On December 8, 2005, the Board of Directors of the Company,
upon the recommendation of its Compensation Committee, approved
the acceleration of vesting of all outstanding, unvested stock
options previously awarded to the Companys employees and
officers, including executive officers, under the UST Inc.
Amended and Restated Stock Incentive Plan and the UST Inc. 1992
Stock Option Plan. As a result of the acceleration, stock
options to acquire approximately 1.1 million shares of the
Companys common stock became exercisable on
December 31, 2005. All other terms related to these stock
options were not affected by this acceleration. The exercise
prices of the accelerated options range from $33.25 to $40.94.
The closing price of UST Inc. common stock on December 30,
2005 was $40.83.

In order to prevent unintended personal benefits to the
Companys officers, the accelerated vesting was conditioned
on such officers entering into an amendment to their original
option award agreements providing that such officers will not,
subject to limited exceptions, sell, transfer, assign, pledge or
otherwise dispose of any shares acquired upon exercising the
accelerated portion of the options before the earlier of the
date on which that portion of the options would have otherwise
vested under the original terms of the applicable option
agreements or separation from service.

The decision to accelerate the vesting of these options during
2005 was made in connection with the Companys current
intention to use other forms of equity compensation with
decreasing dependence on stock options and to reduce the
compensation expense that the Company would otherwise be
required to record in future periods following the
Companys adoption of Statement No. 123(R) on
January 1, 2006. As a result of the acceleration of these
options, the Company will avoid recognizing approximately
$3 million in 2006 and $0.5 million in 2007 in
incremental compensation expense associated with these options
in its 2006 and 2007 Consolidated Statements of Operations.
These amounts, however, are included in the 2005 total
stock-based employee compensation expense determined under the
fair value method for all awards, net of related tax effect, for
pro forma purposes in the Stock-Based Compensationsection of the Summary of Significant Accounting Policies
note to the Consolidated Financial Statements.

Based on the market price of the Companys common stock on
December 30, 2005, approximately 906,000 of the options
accelerated were
in-the-money.
A stock option is deemed to be
in-the-money
if the market price of the Companys common stock exceeds
the accelerated options exercise price as of the
acceleration date. The Company recorded a non-cash compensation
expense charge of approximately $0.3 million in the fourth
quarter of 2005 in connection with the acceleration of these
in-the-money
options. In accordance with APB Opinion No. 25 and
Financial Accounting Standards Board Interpretation No. 44,
Interpretation of APB Opinion No. 25, this charge
was based upon the estimated number of
in-the-money
options that employees will retain as a result of the
acceleration that otherwise would have forfeited prior to the
original vesting dates.

In May 2005, the Company authorized that 10 million shares
of its common stock be reserved for issuance under the 2005
LTIP, which was approved by stockholders at the Companys
Annual Meeting on May 3, 2005. As of that date, all
stock-based awards were issued from the 2005 LTIP, as the UST
Inc. Amended and Restated Stock Incentive Plan, the Nonemployee
Directors Stock Option Plan and the Nonemployee
Directors Restricted Stock Award Plan are considered to be
inactive. Forfeitures from these inactive plans are transferred
into the 2005 LTIP as they occur, and are considered available
for future issuance under the 2005 LTIP.

Under the 2005 LTIP and the Companys other inactive plans,
options were granted at not less than the fair market value on
the date of grant. In accordance with the intrinsic value-based
method prescribed by APB Opinion No. 25, no compensation
expense was recognized through December 31, 2005 for these
stock





51



---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Stock-Based Compensation (continued)

options granted. However, with the January 1, 2006 adoption
of Statement 123(R), compensation expense will be
recognized in the Consolidated Statement of Operations based on
the fair values of the unvested portion of an award made to an
executive officer in December 2005, under the 2005 LTIP, and of
option awards made subsequent to January 1, 2006, if any.

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

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:

|                        |  |      |            |   |      |  |            |      |  |  |            |  
|----------------------- |  | ---- | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                        |  |      |           
|                        |  | 2005 |            |   | 2004 |  |            | 2003 | 
|                        |  |      |           
|Expected dividend yield |  |      | 4.9        | % |      |  | 5.0        | %    |  |  | 5.0        | %
|Risk-free interest rate |  |      | 4.5        | % |      |  | 3.9        | %    |  |  | 3.5        | %
|Expected volatility     |  |      | 24.2       | % |      |  | 13.2       | %    |  |  | 34.1       | %
|Expected life of option |  |      | 7.3  years |   |      |  | 7.5  years |      |  |  | 7.5  years |  



|                                                                   |  |           |          |           |          |   |       |           |           |  |          |   |  |           |       |  |          |  |          |   |  |   |       | 
|------------------------------------------------------------------ |  | --------- | -------- | --------- | -------- | - | ----- | --------- | --------- |  | -------- | - |  | --------- | ----- |  | -------- |  | -------- | - |  | - | ----- | 
|                                                                   |  | 2005      |          |           | 2004     |   |       | 2003      |          
|                                                                   |  |           |         
|                                                                   |  |           |          | 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                                   |  |           | 9,120.3  |           |          | $ | 31.68 |           |           |  | 12,152.6 |   |  | $         | 29.98 |  |          |  | 12,825.5 |   |  | $ | 28.41 | 
|Granted                                                            |  |           | 58.9     |           |          |   | 40.60 |           |           |  | 879.3    |   |  |           | 39.29 |  |          |  | 1,402.1  |   |  |   | 33.24 | 
|Exercised                                                          |  |           | (2,179.0 | )         |          |   | 30.10 |           |           |  | (3,849.0 | ) |  |           | 28.07 |  |          |  | (2,011.5 | ) |  |   | 22.23 | 
|Forfeited                                                          |  |           | (143.9   | )         |          |   | 37.79 |           |           |  | (43.8    | ) |  |           | 33.50 |  |          |  | (39.4    | ) |  |   | 30.34 | 
|Expired                                                            |  |           | (10.7    | )         |          |   | 30.97 |           |           |  | (18.8    | ) |  |           | 27.81 |  |          |  | (24.1    | ) |  |   | 25.50 | 
|                                                                   |  |           |          |           |          |   |       |           |           |  |          |   |  |           |       |  |          | 
|Outstanding at end of year                                         |  |           | 6,845.6  |           |          | $ | 32.13 |           |           |  | 9,120.3  |   |  | $         | 31.68 |  |          |  | 12,152.6 |   |  | $ | 29.98 | 
|                                                                   |  |           |          |           |          |   |       |           |           |  |          |   |  |           |       |  |          | 
|Exercisable at end of year                                         |  |           | 6,795.6  |           |          | $ | 32.08 |           |           |  | 7,083.8  |   |  | $         | 30.11 |  |          |  | 9,783.1  |   |  | $ | 28.83 | 
|Weighted-average fair value of
    options granted during the year |  |           |          |           |          | $ | 6.86  |           |           |  |          |   |  | $         | 2.76  |  |          |  |          |   |  | $ | 7.21  | 







52




---



##### 

10K


The following table summarizes information about stock options
outstanding at December 31, 2005 (options in thousands):

|                |               |                     |         |           |                     |  |           |           |  |   |           |           |  |          |         |         |  |   |       |       | 
|--------------- | ------------- | ------------------- | ------- | --------- | ------------------- |  | --------- | --------- |  | - | --------- | --------- |  | -------- | ------- | ------- |  | - | ----- | ----- | 
|                |               | Options Outstanding |         |           | Options Exercisable | 
|                |               |                     |         |           |                     | 
|                |               |                     |         | Weighted- |                     |  | Weighted- |           |  |   |           | Weighted- | 
|                |               |                     |         | Average   |                     |  | Average   |           |  |   |           | Average   | 
|Range of        |               | Number of           |         |           | Remaining           |  |           | Exercise  |  |   | Number of |           |  | Exercise |        
|Exercise Prices |               | Options             |         |           | Contractual Life    |  |           | Price     |  |   | Options   |           |  | Price    |        
|                |              
|$15.06 - 15.53  |               |                     | 602.1   |           |                     |  | 4.5 years |           |  | $ | 15.06     |           |  |          | 602.1   |         |  | $ | 15.06 |      
|                | 27.69 - 40.94 |                     |         | 6,234.5   |                     |  |           | 5.1 years |  |   |           | 33.75     |  |          |         | 6,184.5 |  |   |       | 33.71 | 
|                | 53.08         |                     |         | 9.0       |                     |  |           | 9.1 years |  |   |           | 53.08     |  |          |         | 9.0     |  |   |       | 53.08 | 
|                |               |                     |         |           |                     |  |           |           |  |   |           |           |  |          |        
|$15.06 - 53.08  |               |                     | 6,845.6 |           |                     |  | 5.1 years |           |  | $ | 32.13     |           |  |          | 6,795.6 |         |  | $ | 32.08 |      
|                |               |                     |         |           |                     |  |           |           |  |   |           |           |  |          |        

















53




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Accumulated Other Comprehensive Loss (continued)

Changes in Stockholders Equity (Deficit). Changes in
accumulated other comprehensive loss are recorded directly to
stockholders equity and do not affect the net earnings or
cash flows of the Company.

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

|                             |                         |             |        |       |            |   |         |               |   |   |               |       |  |   |         |        | 
|---------------------------- | ----------------------- | ----------- | ------ | ----- | ---------- | - | ------- | ------------- | - | - | ------------- | ----- |  | - | ------- | ------ | 
|                             |                         |             |       
|                             |                         |             |        | Total |           
|                             |                         | Foreign     |        |       | Minimum    |   |         | Fair Value of |   |   | Accumulated   |      
|                             |                         | Currency    |        |       | Pension    |   |         | Derivative    |   |   | Other         |      
|                             |                         | Translation |        |       | Liability  |   |         | Instruments   |   |   | Comprehensive |      
|                             |                         | Adjustment  |        |       | Adjustment |   |         | Adjustment    |   |   | (Loss) Income |      
|                             |                         |             |       
|Balance at December 31, 2002 |                         | $           | (4,400 | )     |            | $ | (53,906 | )             |   | $ | (4,573        | )     |  | $ | (62,879 | )     
|                             | Net change for the year |             |        | 1,599 |            |   |         | 36,969        |   |   |               | 853   |  |   |         | 39,421 | 
|                             |                         |            
|Balance at December 31, 2003 |                         |             | (2,801 | )     |            |   | (16,937 | )             |   |   | (3,720        | )     |  |   | (23,458 | )     
|                             | Net change for the year |             |        | 1,751 |            |   |         | 959           |   |   |               | 837   |  |   |         | 3,547  | 
|                             |                         |            
|Balance at December 31, 2004 |                         |             | (1,050 | )     |            |   | (15,978 | )             |   |   | (2,883        | )     |  |   | (19,911 | )     
|                             | Net change for the year |             |        | 1,161 |            |   |         | (452          | ) |   |               | 1,400 |  |   |         | 2,109  | 
|                             |                         |            
|Balance at December 31, 2005 |                         | $           | 111    |       |            | $ | (16,430 | )             |   | $ | (1,483        | )     |  | $ | (17,802 | )     
|                             |                         |            



|                                                    |  |      |        |   |      |   |        |      |  |   |         |  
|--------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                    |  |      |       
|                                                    |  | 2005 |        |   | 2004 |   |        | 2003 | 
|                                                    |  |      |       
|Foreign currency translation
    adjustment         |  | $    | (625   | ) |      | $ | (943   | )    |  | $ | (862    | )
|Minimum pension liability adjustment                |  |      | 244    |   |      |   | (516   | )    |  |   | (19,906 | )
|Fair value of derivative
    instruments adjustment |  |      | (754   | ) |      |   | (451   | )    |  |   | (459    | )
|                                                    |  |     
|                                                    |  | $    | (1,135 | ) |      | $ | (1,910 | )    |  | $ | (21,227 | )
|                                                    |  |     











54




---



##### 

10K


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, 2005 and 2004, respectively:

|                                                                           |                                                    |               |   |                |               |  |   |          |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------- | -------------------------------------------------- | ------------- | - | -------------- | ------------- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                           |                                                    |               |  
|                                                                           |                                                    |               |   | Postretirement |              
|                                                                           |                                                    |               |   | Benefits Other |              
|                                                                           |                                                    | Pension Plans |   |                | than Pensions | 
|                                                                           |                                                    |               |  
|                                                                           |                                                    | 2005          |   |                | 2004          |  |   | 2005     |   |  | 2004 |        
|                                                                           |                                                    |               |  
|Change in Benefit
    Obligation                                           |                                                    |               |   |                |               |  |   |          |   |  |      |         |   |  |   |        
|                                                                           | Benefit obligation at beginning of
    year        |               | $ | 493,334        |               |  | $ | 453,081  |   |  | $    | 92,631  |   |  | $ | 77,904  |  
|                                                                           | Service cost                                       |               |   | 18,332         |               |  |   | 16,688   |   |  |      | 5,659   |   |  |   | 4,734   |  
|                                                                           | Interest cost                                      |               |   | 28,744         |               |  |   | 27,493   |   |  |      | 5,340   |   |  |   | 4,854   |  
|                                                                           | Plan participants
    contributions               |               |   |               |               |  |   |         |   |  |      | 353     |   |  |   | 313     |  
|                                                                           | Plan amendments                                    |               |   | 340            |               |  |   |         |   |  |      | (20,800 | ) |  |   |        |  
|                                                                           | Actuarial loss                                     |               |   | 14,863         |               |  |   | 15,532   |   |  |      | 7,176   |   |  |   | 13,425  |  
|                                                                           | Medicare Part D, including
    subsidy             |               |   |               |               |  |   |         |   |  |      |        |   |  |   | (4,100  | )
|                                                                           | Benefits paid                                      |               |   | (20,909        | )             |  |   | (19,460  | ) |  |      | (5,375  | ) |  |   | (4,499  | )
|                                                                           |                                                    |              
|                                                                           | Benefit obligation at end of
    year              |               | $ | 534,704        |               |  | $ | 493,334  |   |  | $    | 84,984  |   |  | $ | 92,631  |  
|                                                                           |                                                    |              
|Change in Plan Assets                                                      |                                                    |               |   |                |               |  |   |          |   |  |      |         |   |  |   |        
|                                                                           | Fair value of plan assets at
    beginning of year |               | $ | 355,891        |               |  | $ | 327,741  |   |  |      |        |   |  |   |        |  
|                                                                           | Actual return on plan assets                       |               |   | 18,886         |               |  |   | 43,048   |   |  |      |        |   |  |   |        |  
|                                                                           | Employer contributions                             |               |   | 17,371         |               |  |   | 5,680    |   |  |      |        |   |  |   |        |  
|                                                                           | Benefits paid                                      |               |   | (20,909        | )             |  |   | (19,460  | ) |  |      |        |   |  |   |        |  
|                                                                           | Administrative expenses                            |               |   | (1,203         | )             |  |   | (1,118   | ) |  |      |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Fair value of plan assets at end
    of year       |               | $ | 370,036        |               |  | $ | 355,891  |   |  |      |        |   |  |   |        |  
|                                                                           |                                                    |              
|Funded Status                                                              |                                                    |               |   |                |               |  |   |          |   |  |      |         |   |  |   |        
|                                                                           | Funded status at end of year                       |               | $ | (164,668       | )             |  | $ | (137,443 | ) |  | $    | (84,984 | ) |  | $ | (92,631 | )
|                                                                           | Unrecognized actuarial loss                        |               |   | 125,565        |               |  |   | 108,905  |   |  |      | 23,737  |   |  |   | 17,683  |  
|                                                                           | Unrecognized prior service cost
    (benefit)      |               |   | 36             |               |  |   | (305     | ) |  |      | (24,572 | ) |  |   | (6,926  | )
|                                                                           | Unrecognized transition obligation                 |               |   | (17            | )             |  |   | (25      | ) |  |      |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Accrued benefit cost                               |               | $ | (39,084        | )             |  | $ | (28,868  | ) |  | $    | (85,819 | ) |  | $ | (81,874 | )
|                                                                           |                                                    |              
|Amounts Recognized in the
    Consolidated Statement of Financial Position |                                                    |               |   |                |               |  |   |          |   |  |      |         |   |  |   |        
|                                                                           | Prepaid benefit cost                               |               | $ | 32,422         |               |  | $ | 46,295   |   |  | $    |        |   |  | $ |        |  
|                                                                           | Accrued benefit liability                          |               |   | (97,902        | )             |  |   | (100,670 | ) |  |      | (85,819 | ) |  |   | (81,874 | )
|                                                                           | Intangible asset                                   |               |   | 1,118          |               |  |   | 925      |   |  |      |        |   |  |   |        |  
|                                                                           | Accumulated other comprehensive loss               |               |   | 25,278         |               |  |   | 24,582   |   |  |      |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Net amount recognized                              |               | $ | (39,084        | )             |  | $ | (28,868  | ) |  | $    | (85,819 | ) |  | $ | (81,874 | )
|                                                                           |                                                    |              





55




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Employee Benefit and Compensation Plans (continued)

Assumptions

|                                                                                 |  |               |      |                |               |  |      |      |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | ------------- | ---- | -------------- | ------------- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                                                 |  |               |     
|                                                                                 |  |               |      | Postretirement |              
|                                                                                 |  |               |      | Benefits Other |              
|                                                                                 |  | Pension Plans |      |                | than Pensions | 
|                                                                                 |  |               |     
|                                                                                 |  | 2005          |      |                | 2004          |  |      | 2005 |  |  | 2004 |  
|                                                                                 |  |               |     
|The weighted-average assumptions
    used to determine benefit obligations       |  |               |      |                |               |  |      |      |  |  |      |   |  |  |      |  
|Discount rate                                                                    |  |               | 5.75 | %              |               |  | 6.00 | %    |  |  | 5.75 | % |  |  | 6.00 | %
|Rate of compensation increase                                                    |  |               | 4.80 | %              |               |  | 4.80 | %    |  |  |     |   |  |  |     |  
|The weighted-average assumptions
    used to determine net periodic benefit cost |  |               |      |                |               |  |      |      |  |  |      |   |  |  |      |  
|Discount rate                                                                    |  |               | 6.00 | %              |               |  | 6.25 | %    |  |  | 6.00 | % |  |  | 6.25 | %
|Expected return on plan assets                                                   |  |               | 7.50 | %              |               |  | 7.50 | %    |  |  |     |   |  |  |     |  
|Rate of compensation increase                                                    |  |               | 4.80 | %              |               |  | 4.80 | %    |  |  |     |   |  |  |     |  





|                                                       |                           |               |         |                         |                     |   |         |        |  |   |         |        |  |      |        |       |      |   |        |       |  |   |        |       | 
|------------------------------------------------------ | ------------------------- | ------------- | ------- | ----------------------- | ------------------- | - | ------- | ------ |  | - | ------- | ------ |  | ---- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                       |                           |               |        
|                                                       |                           |               |         | Postretirement Benefits |                    
|                                                       |                           | Pension Plans |         |                         | Other than Pensions |  
|                                                       |                           |               |        
|                                                       |                           | 2005          |         |                         | 2004                |   |         | 2003   |  |   | 2005    |        |  | 2004 |        |       | 2003 |  
|                                                       |                           |               |        
|Service cost                                           |                           | $             | 18,332  |                         |                     | $ | 16,688  |        |  | $ | 15,634  |        |  | $    | 5,659  |       |      | $ | 4,734  |       |  | $ | 4,010  |      
|Interest cost                                          |                           |               | 28,744  |                         |                     |   | 27,493  |        |  |   | 26,037  |        |  |      | 5,340  |       |      |   | 4,854  |       |  |   | 4,308  |      
|Expected return on plan assets                         |                           |               | (25,100 | )                       |                     |   | (23,282 | )      |  |   | (18,189 | )      |  |      |       |       |      |   |       |       |  |   |       |      
|Amortization of unrecognized
    transition obligation |                           |               | (8      | )                       |                     |   | (8      | )      |  |   | 215     |        |  |      |       |       |      |   |       |       |  |   |       |      
|Amortization of prior service cost                     |                           |               | (1      | )                       |                     |   | (43     | )      |  |   | (56     | )      |  |      | (3,153 | )     |      |   | (4,374 | )     |  |   | (5,540 | )    
|Recognized actuarial loss                              |                           |               | 5,620   |                         |                     |   | 6,935   |        |  |   | 9,498   |        |  |      | 1,120  |       |      |   | 339    |       |  |   | 112    |      
|                                                       |                           |              
|                                                       | Net periodic benefit cost |               | $       | 27,587                  |                     |   | $       | 27,783 |  |   | $       | 33,139 |  |      | $      | 8,966 |      |   | $      | 5,553 |  |   | $      | 2,890 | 
|                                                       |                           |              







56




---



##### 

10K


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

|                               |  |               |         |          |             |   |         |               |          |   |             |  |  |   |         | 
|------------------------------ |  | ------------- | ------- | -------- | ----------- | - | ------- | ------------- | -------- | - | ----------- |  |  | - | ------- | 
|                               |  | 2005          |         |          | 2004        |  
|                               |  |               |         |          |             |  
|                               |  |               |         | Plans in |             |   |         |               | Plans in |  
|                               |  | Plans in      |         |          | Which       |   |         | Plans in      |          |   | Which       | 
|                               |  | Which         |         |          | Accumulated |   |         | Which         |          |   | Accumulated | 
|                               |  | Assets Exceed |         |          | Benefits    |   |         | Assets Exceed |          |   | Benefits    | 
|                               |  | Accumulated   |         |          | Exceed      |   |         | Accumulated   |          |   | Exceed      | 
|                               |  | Benefits      |         |          | Assets      |   |         | Benefits      |          |   | Assets      | 
|                               |  |               |         |          |             |  
|Accumulated benefit obligation |  | $             | 277,098 |          |             | $ | 180,823 |               |          | $ | 251,551     |  |  | $ | 173,318 | 
|Projected benefit obligation   |  |               | 338,183 |          |             |   | 196,521 |               |          |   | 305,252     |  |  |   | 188,082 | 
|Fair value of plan assets      |  |               | 286,751 |          |             |   | 83,285  |               |          |   | 282,904     |  |  |   | 72,987  | 







Weighted-Average Asset Allocations by Asset Category


|                  |  |           |        |                    |      |      |      |     
|----------------- |  | --------- | ------ | ------------------ | ---- | ---- | ---- | ----
|                  |  |           |        | Pension Plans    
|                  |  |           |        | Allocation of Plan
|                  |  |           |        | Assets at         
|                  |  |           |        | December 31       
|                  |  |           |        |                   
|                  |  | Target    |        |                    | 2005 |      | 2004
|                  |  | Alloation |        |                    |     
|                  |  |           |        |                    |     
|Asset Category    |  |           |        |                    |      |      |      |     
|Equity securities |  |           | 60-75% |                    |      | 73%  |      | 76% 
|Debt securities   |  |           | 20-35% |                    |      | 27%  |      | 24% 
|Other             |  |           | 0-5%   |                    |      | 0%   |      | 0%  
|                  |  |           |        |                    |     
|                  |  |           |        |                    |      | 100% |      | 100%
|                  |  |           |        |                    |     







57




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Employee Benefit and Compensation Plans (continued)



Weighted-Average Asset Allocations by Asset
Category (continued)

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

Consistent with this strategy, the Company is currently
completing an asset-liability management study to ascertain
whether its current targets for the allocation of Plan assets
are efficient. While the Company cannot say with certainty, it
does not anticipate that major changes in the Plans asset
allocation targets will result. However, it is possible that
some adjustments to these targets could be made that would
impact the Companys future expectation of its long-term
investment return on Plan assets, and that any such adjustment
could result in a higher or lower expected return assumption.

Cash Flows

During 2005, the Company made a discretionary contribution of
$11.6 million to its qualified defined benefit pension
plans. No contributions were made by the Company during 2004 to
its qualified defined benefit pension plans.

During 2005 and 2004, the Company made contributions of
$5.8 million and $5.7 million, respectively, to its
non-qualified defined benefit pension plans. The Company expects
to contribute $6.5 million to its non-qualified defined
benefit pension plans in 2006.

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

|                                                |  |      |        |  |      |   |        |      |  |   |        |  |  |      |        |  |           |   |        |  |  |   |         | 
|----------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | --------- | - | ------ |  |  | - | ------- | 
|                                                |  |      |       
|                                                |  | 2006 |        |  | 2007 |   |        | 2008 |  |   | 2009   |  |  | 2010 |        |  | 2011-2015 |  
|                                                |  |      |       
|Pension plans                                   |  | $    | 23,260 |  |      | $ | 24,127 |      |  | $ | 25,468 |  |  | $    | 26,752 |  |           | $ | 28,273 |  |  | $ | 166,083 | 
|Postretirement benefits other than
    pensions |  | $    | 5,331  |  |      | $ | 5,715  |      |  | $ | 6,164  |  |  | $    | 6,492  |  |           | $ | 6,809  |  |  | $ | 39,601  | 

Additional Information


|                                                                                                          |  |               |     |  |      |   |      |  
|--------------------------------------------------------------------------------------------------------- |  | ------------- | --- |  | ---- | - | ---- | -
|                                                                                                          |  | Pension Plans |    
|                                                                                                          |  |               |    
|                                                                                                          |  | 2005          |     |  | 2004 |  
|                                                                                                          |  |               |    
|Increase (decrease) in minimum
    pension liability included in other comprehensive loss, net of
    tax |  | $             | 452 |  |      | $ | (959 | )





58




---



##### 

10K


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

In October 2005, in light of the prescription drug benefits
offered under Medicare Part D, the Company announced that,
effective January 1, 2006, its welfare benefit plans will
no longer include prescription drug coverage for substantially
all Medicare-eligible retirees or their Medicare-eligible
spouses or dependents. In accordance with FSP
No. 106-2, this
amendment to reduce coverage to levels that are no longer deemed
actuarially equivalent does not impact the actuarial experience
gain previously recognized in connection with the subsidy.
However, the combined impact of the amendment and the effective
elimination of the subsidy are reflected as a credit to prior
service cost. Due to this amendment, the subsidy to be received
under the Act is not expected to be material for any of the
years presented in the above table of future benefit payments.

In accordance with SFAS No. 106, Employers
Accounting for Postretirement Benefits Other than Pensions,
the impact of the October plan amendment effectively eliminating
prescription drug benefits, along with the impact of other
amendments to retiree health and welfare plans, all communicated
in the same October announcement, were recognized beginning in
the fourth quarter of 2005. The impact of these amendments is
included in the Plan amendments line item in the
Change in Benefit Obligation table on page 55.
These amendments will continue to impact net periodic
postretirement benefit cost over the estimated remaining service
period of affected participants. The impact of these amendments
to the Companys 2005 consolidated statements of operations
and financial position was not material.

The Company sponsors a defined contribution plan (the
Employees Savings Plan) covering substantially
all of its employees. Employees are eligible to participate in
the Employees Savings Plan from the commencement of their
employment provided they are scheduled to work at least
1,000 hours per year. Company contributions are based upon
participant contributions and begin upon completion of one year
of service. The expense associated with Company contributions
was $6.2 million in 2005 and $5.9 million in both 2004
and 2003.

The Company has an Incentive Compensation Plan (ICP)
which provides for bonus payments to designated employees based
on stated percentages of earnings before income taxes as defined
in the ICP. The ICP also allows for discretionary reductions to
this calculated amount. Expenses under the ICP amounted to
$41.3 million in 2005, $43.6 million in 2004 and
$25.8 million in 2003. The 2003 expense reflects a
reduction in the Companys ICP to offset a
$15.9 million charge related to a second-tier subsidiary.





59



---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Income Taxes

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

|          |                 |                |         |         |         |   |         |         |         |   |         |         |         |  
|--------- | --------------- | -------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|          |                 |                |        
|          |                 | 2005           |         |         | 2004    |   |         | 2003    |        
|          |                 |                |        
|Current:  |                 |                |         |         |         |   |         |         |         |   |         |        
|          | Federal         |                | $       | 251,001 |         |   | $       | 193,073 |         |   | $       | 250,030 |        
|          | State and local |                |         | 23,181  |         |   |         | 5,698   |         |   |         | 27,141  |        
|          |                 |               
|          |                 | Total current  |         |         | 274,182 |   |         |         | 198,771 |   |         |         | 277,171 |  
|          |                 |               
|Deferred: |                 |                |         |         |         |   |         |         |         |   |         |        
|          | Federal         |                |         | 10,618  |         |   |         | 86,686  |         |   |         | (68,396 | )      
|          | State and local |                |         | 8,549   |         |   |         | 14,081  |         |   |         | (11,094 | )      
|          |                 |               
|          |                 | Total deferred |         |         | 19,167  |   |         |         | 100,767 |   |         |         | (79,490 | )
|          |                 |               
|          |                 | $              | 293,349 |         |         | $ | 299,538 |         |         | $ | 197,681 |        
|          |                 |               

paid-in








|                          |                                                                   |                                           |   |        |        |  |   |        |         |  
|------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | - | ------ | ------ |  | - | ------ | ------- | -
|                          |                                                                   |                                           |  
|                          |                                                                   | 2005                                      |   |        | 2004   | 
|                          |                                                                   |                                           |  
|Deferred tax assets:      |                                                                   |                                           |   |        |        |  |   |       
|                          | Postretirement benefits other than
    pensions                   |                                           | $ | 29,378 |        |  | $ | 28,386 |        
|                          | Accrued pension liabilities                                       |                                           |   | 33,324 |        |  |   | 34,431 |        
|                          | Antitrust litigation                                              |                                           |   | 5,869  |        |  |   | 10,236 |        
|                          | Other accrued liabilities                                         |                                           |   | 13,592 |        |  |   | 12,863 |        
|                          | Net operating loss, tax credit and
    capital loss carryforwards |                                           |   | 4,571  |        |  |   | 12,047 |        
|                          | All other, net                                                    |                                           |   | 1,394  |        |  |   | 1,794  |        
|                          |                                                                   |                                          
|                          |                                                                   | Total deferred tax assets                 |   |        | 88,128 |  |   |        | 99,757  |  
|                          |                                                                   |                                          
|Deferred tax liabilities: |                                                                   |                                           |   |        |        |  |   |       
|                          | Depreciation                                                      |                                           |   | 69,798 |        |  |   | 61,528 |        
|                          | Prepaid pension asset                                             |                                           |   | 11,348 |        |  |   | 16,203 |        
|                          | Capitalized debt costs                                            |                                           |   | 428    |        |  |   | 1,904  |        
|                          | Inventory-related adjustments                                     |                                           |   | 6,904  |        |  |   | 170    |        
|                          |                                                                   |                                          
|                          |                                                                   | Total deferred tax liabilities            |   |        | 88,478 |  |   |        | 79,805  |  
|                          |                                                                   |                                          
|                          |                                                                   | Net deferred tax liabilities
    (assets) |   | $      | 350    |  |   | $      | (19,952 | )
|                          |                                                                   |                                          





60




---



##### 

10K


Pretax state net operating loss and tax credit carryforwards
totaled $33 million and $138.6 million at
December 31, 2005 and 2004, respectively. The Company
expects to utilize these carryforwards prior to their expiration
between 2006 and 2022. In addition, the Company has pretax
federal capital loss carryforwards of $2.2 million and $3.7
million at December 31, 2005 and 2004, respectively. The
Company expects to utilize these carryforwards prior to their
expiration between 2006 and 2007.

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

|                                                      |  |      |      |   |      |  |      |      |  |  |      |  
|----------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                                      |  |      |     
|                                                      |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                                                      |  |      |     
|U.S. federal statutory income
    tax rate            |  |      | 35.0 | % |      |  | 35.0 | %    |  |  | 35.0 | %
|State and local taxes, net of
    federal tax benefit |  |      | 2.8  |   |      |  | 2.6  |      |  |  | 2.0  |  
|Manufacturing deduction                               |  |      | (1.0 | ) |      |  |     |      |  |  |     |  
|Reversals of income tax accruals                      |  |      | (2.2 | ) |      |  | (2.3 | )    |  |  |     |  
|Other, net                                            |  |      | 0.8  |   |      |  | 0.5  |      |  |  | 1.0  |  
|                                                      |  |     
|                                                      |  |      | 35.4 | % |      |  | 35.8 | %    |  |  | 38.0 | %
|                                                      |  |     













61




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 All Other
Operations. This caption is comprised of the Companys
international operations, which market moist smokeless tobacco
products in select markets. The Company operates primarily in
the United States. Foreign operations and export sales are not
significant.

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

Wine segment sales are principally made to wholesalers, which
are located throughout the United States. Over the past three
years, sales to two customers have averaged approximately
43.9 percent of annual Wine segment sales.

Net sales and operating profit are reflected net of intersegment
sales and profits.

Operating profit is comprised of 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).

The decrease in identifiable assets in Corporate assets in 2005
was primarily due to the $300 million cash payment for
senior notes, upon maturity, in March 2005. The decrease in
identifiable assets in All Other Operations in 2004 was
primarily due to the transfer of the Companys cigar
operation. See the Discontinued Operations note for more details
on this transfer. Corporate assets consist mainly of cash and
cash equivalents and short-term investments which reflect a
decrease in 2005. 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 and identifiable
assets. Interest, net and income taxes are not allocated and
reported by segment, since they are excluded from the measure of
segment performance reviewed by management.





62



---



##### 

10K

|                                        |                    |                                  |   |           |           |  |   |           |           |  |   |           |           | 
|--------------------------------------- | ------------------ | -------------------------------- | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                        |                    | Year Ended December 31           |  
|                                        |                    |                                  |  
|                                        |                    | 2005                             |   |           | 2004      |  |   | 2003      |          
|                                        |                    |                                  |  
|Net Sales to Unaffiliated
    Customers |                    |                                  |   |           |           |  |   |           |           |  |   |          
|                                        | Smokeless Tobacco  |                                  | $ | 1,561,667 |           |  | $ | 1,575,254 |           |  | $ | 1,504,893 |          
|                                        | Wine               |                                  |   | 248,342   |           |  |   | 226,650   |           |  |   | 194,905   |          
|                                        | All Other          |                                  |   | 41,876    |           |  |   | 36,334    |           |  |   | 32,064    |          
|                                        |                    |                                 
|                                        |                    | Net sales                        |   | $         | 1,851,885 |  |   | $         | 1,838,238 |  |   | $         | 1,731,862 | 
|                                        |                    |                                 
|Operating Profit                        |                    |                                  |   |           |           |  |   |           |           |  |   |          
|                                        | Smokeless Tobacco  |                                  | $ | 852,478   |           |  | $ | 897,991   |           |  | $ | 585,910   |          
|                                        | Wine               |                                  |   | 37,764    |           |  |   | 32,382    |           |  |   | 24,341    |          
|                                        | All Other          |                                  |   | 14,338    |           |  |   | 10,266    |           |  |   | 7,962     |          
|                                        |                    |                                 
|                                        |                    | Operating profit                 |   |           | 904,580   |  |   |           | 940,639   |  |   |           | 618,213   | 
|                                        | Corporate expenses |                                  |   | (26,385   | )         |  |   | (28,030   | )         |  |   | (21,578   | )        
|                                        | Interest, net      |                                  |   | (50,578   | )         |  |   | (75,019   | )         |  |   | (76,905   | )        
|                                        |                    |                                 
|                                        |                    | Earnings before income
    taxes |   | $         | 827,617   |  |   | $         | 837,590   |  |   | $         | 519,730   | 
|                                        |                    |                                 
|Identifiable Assets at
    December 31  |                    |                                  |   |           |           |  |   |           |           |  |   |          
|                                        | Smokeless Tobacco  |                                  | $ | 632,438   |           |  | $ | 631,531   |           |  | $ | 768,978   |          
|                                        | Wine               |                                  |   | 494,320   |           |  |   | 488,904   |           |  |   | 485,019   |          
|                                        | All Other          |                                  |   | 31,283    |           |  |   | 25,819    |           |  |   | 60,282    |          
|                                        | Corporate          |                                  |   | 208,942   |           |  |   | 513,229   |           |  |   | 412,215   |          
|                                        |                    |                                 
|                                        |                    | Total assets                     |   | $         | 1,366,983 |  |   | $         | 1,659,483 |  |   | $         | 1,726,494 | 
|                                        |                    |                                 
|Capital Expenditures                    |                    |                                  |   |           |           |  |   |           |           |  |   |          
|                                        | Smokeless Tobacco  |                                  | $ | 76,825    |           |  | $ | 60,047    |           |  | $ | 31,840    |          
|                                        | Wine               |                                  |   | 12,207    |           |  |   | 9,283     |           |  |   | 16,304    |          
|                                        | All Other          |                                  |   | 193       |           |  |   | 358       |           |  |   | 151       |          
|                                        | Corporate          |                                  |   | 722       |           |  |   | 638       |           |  |   | 649       |          
|                                        |                    |                                 
|                                        |                    | Capital expenditures             |   | $         | 89,947    |  |   | $         | 70,326    |  |   | $         | 48,944    | 
|                                        |                    |                                 
|Depreciation                            |                    |                                  |   |           |           |  |   |           |           |  |   |          
|                                        | Smokeless Tobacco  |                                  | $ | 31,302    |           |  | $ | 31,108    |           |  | $ | 23,923    |          
|                                        | Wine               |                                  |   | 13,103    |           |  |   | 13,205    |           |  |   | 13,734    |          
|                                        | All Other          |                                  |   | 175       |           |  |   | 389       |           |  |   | 674       |          
|                                        | Corporate          |                                  |   | 761       |           |  |   | 731       |           |  |   | 739       |          
|                                        |                    |                                 
|                                        |                    | Depreciation                     |   | $         | 45,341    |  |   | $         | 45,433    |  |   | $         | 39,070    | 
|                                        |                    |                                 





|                                          |  |      |         |   |      |   |        |      |  |   |        |  
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                          |  |      |        
|                                          |  | 2005 |         |   | 2004 |   |        | 2003 | 
|                                          |  |      |        
|Interest expense on debt                  |  | $    | 62,984  |   |      | $ | 83,884 |      |  | $ | 83,884 |  
|Interest income from cash
    equivalents |  |      | (10,558 | ) |      |   | (7,859 | )    |  |   | (5,725 | )
|Capitalized interest                      |  |      | (1,848  | ) |      |   | (1,006 | )    |  |   | (1,254 | )
|                                          |  |     
|                                          |  | $    | 50,578  |   |      | $ | 75,019 |      |  | $ | 76,905 |  
|                                          |  |     





63




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Net Earnings per Share

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

|                                    |                                                                        |                                                |   |         |         |  |   |         |         |  |   |         |         | 
|----------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |                                                                        |                                                |  
|                                    |                                                                        | 2005                                           |   |         | 2004    |  |   | 2003    |        
|                                    |                                                                        |                                                |  
|Numerator:                          |                                                                        |                                                |   |         |         |  |   |         |         |  |   |        
|                                    | Earnings from continuing operations                                    |                                                | $ | 534,268 |         |  | $ | 538,052 |         |  | $ | 322,049 |        
|                                    | Loss from discontinued operations,
    net                             |                                                |   |        |         |  |   | (7,215  | )       |  |   | (3,260  | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings                                   |   | $       | 534,268 |  |   | $       | 530,837 |  |   | $       | 318,789 | 
|                                    |                                                                        |                                               
|Denominator:                        |                                                                        |                                                |   |         |         |  |   |         |         |  |   |        
|                                    | Denominator for basic earnings per
    share  weighted-average shares |                                                |   | 163,949 |         |  |   | 165,164 |         |  |   | 166,572 |        
|                                    | Dilutive effect of potential common
    shares                         |                                                |   | 1,548   |         |  |   | 1,458   |         |  |   | 804     |        
|                                    |                                                                        |                                               
|                                    |                                                                        | Denominator for diluted earnings
    per share |   |         | 165,497 |  |   |         | 166,622 |  |   |         | 167,376 | 
|                                    |                                                                        |                                               
|Net earnings per basic
    share:   |                                                                        |                                                |   |         |         |  |   |         |         |  |   |        
|                                    | Earnings from continuing operations                                    |                                                |   | $3.26   |         |  |   | $3.26   |         |  |   | $1.93   |        
|                                    | Loss from discontinued operations                                      |                                                |   |        |         |  |   | (.05    | )       |  |   | (.02    | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings per basic
    share               |   |         | $3.26   |  |   |         | $3.21   |  |   |         | $1.91   | 
|                                    |                                                                        |                                               
|Net earnings per diluted
    share: |                                                                        |                                                |   |         |         |  |   |         |         |  |   |        
|                                    | Earnings from continuing operations                                    |                                                |   | $3.23   |         |  |   | $3.23   |         |  |   | $1.92   |        
|                                    | Loss from discontinued operations                                      |                                                |   |        |         |  |   | (.04    | )       |  |   | (.02    | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings per diluted
    share             |   |         | $3.23   |  |   |         | $3.19   |  |   |         | $1.90   | 
|                                    |                                                                        |                                               













64




---



##### 

10K


No loss on disposal was recorded in 2004, as a charge for the
fair value of the cigar operation was previously recorded in
2003 as a component of the antitrust litigation loss.

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

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





de minimis
















65




---



##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)



Contingencies (continued)

The complaint seeks declaratory and injunctive relief,
unspecified monetary sanctions, attorneys fees and costs,
and a finding of civil contempt.

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 indirect purchasers
(consumers and retailers) and class actions brought by indirect
purchasers of its moist smokeless tobacco products in the states
of California, Kansas, Massachusetts and Wisconsin.

As indirect purchasers of the Companys smokeless tobacco
products during various periods of time ranging from January
1990 to the date of certification or potential certification of
the proposed class, plaintiffs in those actions allege,
individually and on behalf of putative class members in a
particular state or individually and on behalf of class members
in the states of California, Kansas, Massachusetts and
Wisconsin, that the Company has violated the antitrust laws,
unfair and deceptive trade practices statutes and/or common law
of those states. Plaintiffs seek to recover compensatory and
statutory damages in an amount not to exceed $75,000 per
class member or per putative class member, and certain other
relief. The indirect purchaser actions are similar in all
material respects. The Company reached a settlement
(Settlement), which has been approved by the court,
to resolve a significant number of the indirect purchaser
actions. The jurisdictions covered by the settlement are
identified in Part I, Item 3  Legal
Proceedings on page 11. Pursuant to the approved
Settlement, adult consumers will receive coupons redeemable on
future purchases of the Companys moist smokeless tobacco
products. The Company will pay all administrative costs of the
Settlement and plaintiffs attorneys fees. The
Company also intends to pursue settlement of other indirect
purchaser actions not covered by the Settlement on substantially
similar terms. In this regard, the Company continues to make
progress. The Company has resolved indirect purchaser actions in
approximately 80 percent of the states in which they were
filed.

The Company recorded a charge of $40 million in 2003, which
represented its best estimate of the total costs to resolve
indirect purchaser actions. In 2004, certain states
actions were resolved more favorably than originally estimated,
and as a result, the Company recognized a favorable pretax
adjustment in 2004. In 2005, the Company recorded a
$12.5 million net pre-tax charge related to costs to
resolve, subject to court approval, certain states
indirect purchaser actions less favorably than originally
anticipated. At December 31, 2005, the liability associated
with the resolution of these indirect purchaser actions
decreased to $15.1 million from $23.6 million at
December 31, 2004, predominantly as a result of the payment
of plaintiffs attorneys fees, as well as actual
coupon redemption and administrative costs, partially offset by
the net charge recorded in 2005.

Each of the foregoing actions is derived directly from the
Conwood litigation (see Other Matters note). For the plaintiffs
in the putative class actions to prevail, they will have to
obtain class certification. The plaintiffs in the above actions
also will have to obtain favorable determinations on issues
relating to liability, causation and damages. The Company
believes, and has been so advised by counsel handling these
cases, that it has





66



---



##### 

10K


meritorious defenses in this regard, and they are and will
continue to be vigorously defended. The Company believes that
the ultimate outcome of these purported class actions and the
California, Kansas, Massachusetts and Wisconsin class actions
will not have a material adverse effect on its consolidated
financial results or its consolidated financial position,
although if plaintiffs were to prevail, beyond the amounts
accrued, the effect of any judgment or settlement could have a
material adverse impact on its consolidated financial results in
the particular reporting period in which resolved and, depending
on the size of any such judgment or settlement, a material
adverse effect on its consolidated financial position.
Notwithstanding the Companys assessment of the financial
impact of these actions, management is not able to estimate the
amount of loss, if any, beyond the amounts accrued, which could
be associated with an adverse resolution.

Other Matters

On October 22, 2004, the Fair and Equitable Tobacco
Reform Act of 2004 (the Tobacco Reform Act)
was enacted in connection with a comprehensive federal corporate
reform and jobs creation bill. The Tobacco Reform Act
effectively repeals all aspects of the U.S. federal
governments tobacco farmer support program, including
marketing quotas and nonrecourse loans. As a result of the
Tobacco Reform Act, the Secretary of Agriculture will impose
quarterly assessments on tobacco manufacturers and importers,
not to exceed a total of $10.1 billion over a ten-year
period from the date of enactment. Amounts assessed by the
Secretary will be impacted by a number of allocation factors, as
defined in the Tobacco Reform Act. These quarterly assessments
will be used to fund a trust to compensate, or buy
out, tobacco quota farmers, in lieu of the repealed
federal support program. The Company does not believe that the
assessments imposed under the Tobacco Reform Act will have a
material adverse impact on its consolidated financial position,
results of operations or cash flows in any reporting period. In
2005 and 2004, the Company recognized charges of approximately
$4.2 million and $1 million, respectively, associated
with assessments required by the Tobacco Reform Act.

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

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

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





67



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##### 

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Other Matters (continued)

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 in selling, advertising and administrative
expenses by the Company in connection with the STMSA were
$14.8 million, $13.2 million and $11.6 million in
2005, 2004 and 2003, respectively.





68



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##### 

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QUARTERLY FINANCIAL DATA

(Unaudited)

|                           |  |       |         |  |        |   |         |       |  |   |         |  |  |      |         |  |  |   |           | 
|-------------------------- |  | ----- | ------- |  | ------ | - | ------- | ----- |  | - | ------- |  |  | ---- | ------- |  |  | - | --------- | 
|                           |  |       |        
|                           |  | First |         |  | Second |   |         | Third |  |   | Fourth  |  |  | Year |        
|                           |  |       |        
|2005                       |  |       |         |  |        |   |         |       |  |   |         |  |  |      |         |  |  |   |           | 
|Net sales                  |  | $     | 440,527 |  |        | $ | 480,116 |       |  | $ | 456,830 |  |  | $    | 474,412 |  |  | $ | 1,851,885 | 
|Gross profit               |  |       | 340,123 |  |        |   | 370,090 |       |  |   | 346,319 |  |  |      | 352,222 |  |  |   | 1,408,754 | 
|Net earnings               |  |       | 121,832 |  |        |   | 136,525 |       |  |   | 132,234 |  |  |      | 143,677 |  |  |   | 534,268   | 
|Basic earnings per share   |  |       | .74     |  |        |   | .83     |       |  |   | .81     |  |  |      | .88     |  |  |   | 3.26      | 
|Diluted earnings per share |  |       | .73     |  |        |   | .82     |       |  |   | .80     |  |  |      | .88     |  |  |   | 3.23      | 
|2004                       |  |       |         |  |        |   |         |       |  |   |         |  |  |      |         |  |  |   |           | 
|Net sales                  |  | $     | 433,317 |  |        | $ | 464,652 |       |  | $ | 462,023 |  |  | $    | 478,246 |  |  | $ | 1,838,238 | 
|Gross profit               |  |       | 340,063 |  |        |   | 365,996 |       |  |   | 357,334 |  |  |      | 362,204 |  |  |   | 1,425,597 | 
|Net earnings               |  |       | 121,689 |  |        |   | 147,893 |       |  |   | 133,052 |  |  |      | 128,203 |  |  |   | 530,837   | 
|Basic earnings per share   |  |       | .74     |  |        |   | .89     |       |  |   | .81     |  |  |      | .78     |  |  |   | 3.21      | 
|Diluted earnings per share |  |       | .73     |  |        |   | .89     |       |  |   | .80     |  |  |      | .77     |  |  |   | 3.19      | 










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







Item 9A  Controls and Procedures


Evaluation of Disclosure Controls and Procedures


13a-15(e) 15d-15(e)


Report of Management on Internal Control over Financial
Reporting


13a-15(f) 15d-15(f).






69




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##### 

Item 9A  Controls and
Procedures (continued)



Report of Management on Internal Control over Financial
Reporting (continued)

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

Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report included in Part II,
Item 8  Financial Statements and
Supplementary Data, on page 35.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Companys internal
control over financial reporting (as such term is defined in
Rules 13a-15(f)
and 15(d)-15(f) under the Exchange Act) during the fourth
quarter of the fiscal year ended December 31, 2005 that
have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.





Item 9B  Other Information

Not applicable.





PART III







Item 10  Directors and Executive Officers of
the Registrant

The Company hereby incorporates by reference the disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K
which is contained under the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in its Notice of 2006 Annual Meeting and Proxy
Statement.

The Company hereby incorporates by reference the information
with respect to the names, ages and business histories of the
directors of the Company which is contained in the table and the
accompanying text set forth under the caption Election of
Directors in its Notice of 2006 Annual Meeting and Proxy
Statement.

Executive Officers of the Registrant

The name, present position with the Company, age and business
experience of each executive officer of the Company as of
January 31, 2006 is set forth below:

|                           |  |                                                          |  |     |    | 
|-------------------------- |  | -------------------------------------------------------- |  | --- | -- | 
|Name                       |  | Present Position                                         |  | Age |   
|Vincent A.
    Gierer, Jr. |  | Chairman of the Board and Chief
    Executive Officer    |  |     | 58 | 
|Murray S. Kessler          |  | President and Chief Operating
    Officer                |  |     | 46 | 
|Robert T. DAlessandro     |  | Senior Vice President and Chief
    Financial Officer    |  |     | 52 | 
|Richard A. Kohlberger      |  | Senior Vice President, General
    Counsel and Secretary |  |     | 60 | 
|Theodor P. Baseler         |  | President  International
    Wine & Spirits Ltd.        |  |     | 51 | 
|Daniel W. Butler           |  | President 
    U.S. Smokeless Tobacco Company           |  |     | 46 | 









70




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##### 

10K


Company have been employed continuously by it for more than five
years, except for Mr. Butler who joined the Company in 2004.

Mr. Gierer has served as Chairman of the Board and Chief
Executive Officer of the Company since December 1, 1993 and
has served as President from September 27, 1990 to
November 2, 2005. He has been employed by the Company since
March 16, 1978.

Mr. Kessler has served as President and Chief Operating
Officer of the Company, and as a member of the Companys
Board of Directors, since November 3, 2005.
Mr. Kessler served as President of U.S. Smokeless
Tobacco Company (USSTC) from April 6, 2000 to
November 2, 2005. He served as Senior Vice President of
USSTC from January 3, 2000 to April 5, 2000. He has
been employed by the Company since January 3, 2000.

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

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

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

Mr. Butler has served as President of USSTC since
November 3, 2005. He served as Executive Vice President and
General Manager of USSTC from September 1, 2004 to
November 2, 2005. He was employed at Kraft Foods from 1987
to 2004 and held several executive positions of increasing
responsibility. From 2002 to 2004, Mr. Butler served as
Executive Vice President and General Manager of the Nabisco
Biscuit Division of Kraft Foods. From 2000 to 2002, he served as
Executive Vice President and General Manager of Kraft Canada. He
has been employed by USSTC since September 1, 2004.

Code of Ethics

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

Audit Committee Matters

The Company hereby incorporates by reference the information
with respect to its Audit Committee and the Audit
Committee Financial Expert which is contained under the
caption Committees of the Board in its Notice of
2006 Annual Meeting and Proxy Statement.





Item 11  Executive Compensation

The Company hereby incorporates by reference the information
with respect to executive compensation contained in the tables,
related notes thereto and the accompanying text set forth under
the caption Compensation of Executive Officers in
its Notice of 2006 Annual Meeting and Proxy Statement.





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

The Company hereby incorporates by reference the information
with respect to the security ownership of management which is
contained in the table and the accompanying text set forth under
the caption Election of Directors in its Notice of
2006 Annual Meeting and Proxy Statement.





71



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##### 

In addition, the Company hereby incorporates by reference the
information with respect to the security ownership of persons
known to the Company to beneficially own more than
5 percent of the Companys outstanding stock, which is
contained under the caption Beneficial Ownership of Common
Stock in its Notice of 2006 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,
2005. The securities which may be issued consist solely of UST
Inc. Common Stock.

|                                                                      |  |                  |           |     |              |            |       |                  |  |  |           |    
|--------------------------------------------------------------------- |  | ---------------- | --------- | --- | ------------ | ---------- | ----- | ---------------- |  |  | --------- | ---
|                                                                      |  |                  |           |     |              | Number of  |      
|                                                                      |  |                  |           |     |              | Securities |      
|                                                                      |  |                  |           |     |              | Remaining  |      
|                                                                      |  | Number of        |           |     | Weighted     |            |       | Available for    | 
|                                                                      |  | Securities to be |           |     | Average      |            |       | Future Issuance  | 
|                                                                      |  | Issued Upon      |           |     | Exercise     |            |       | Under Equity     | 
|                                                                      |  | Exercise of      |           |     | Price of     |            |       | Compensation     | 
|                                                                      |  | Outstanding      |           |     | Outstanding  |            |       | Plans (Excluding | 
|                                                                      |  | Options,         |           |     | Options,     |            |       | Securities       | 
|                                                                      |  | Warrants and     |           |     | Warrants and |            |       | Reflected in     | 
|                                                                      |  | Rights           |           |     | Rights       |            |       | Column (a))      | 
|Plan Category                                                         |  | (a)              |           |     | (b)          |            |       | (c)              | 
|                                                                      |  |                  |           |     |              |            |       |                  | 
|Equity compensation plans approved
    by security holders            |  |                  | 7,451,987 | (1) |              | $          | 32.88 |                  |  |  | 9,681,406 | (3)
|Equity compensation plans not
    approved by security
    holders(2) |  |                  | 16,490    |     |              | $          | 40.26 |                  |  |  |          |    
|Total                                                                 |  |                  | 7,468,477 |     |              | $          | 32.90 |                  |  |  | 9,681,406 |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of 50,000 shares issuable upon exercise of
    outstanding stock options, 159,900 shares issuable upon
    conversion of outstanding restricted stock, 112,085 shares
    issuable upon conversion of outstanding restricted stock units
    and 10,964 shares issuable upon conversion of outstanding
    deferred stock under the UST Inc. 2005 Long-Term Incentive Plan
    (2005 LTIP). In addition, 1,940,200 shares
    issuable upon exercise of outstanding stock options,
    264,138 shares issuable upon conversion of outstanding
    restricted stock and 59,305 shares issuable upon conversion
    of outstanding restricted stock units under the UST Inc. Amended
    and Restated Stock Incentive Plan (formerly named the UST Inc.
    2001 Stock Option Plan) are included in the above total. Also
    included in the total are 4,770,900 shares and
    84,495 shares issuable upon exercise of outstanding stock
    options under the 1992 Stock Option Plan and the Nonemployee
    Directors Stock Option Plan, respectively.                                                                                                                                                   
|   
|(2) | Includes the Nonemployee Directors Restricted Stock Award
    Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | In May 2005, the Company authorized that 10 million shares
    of its common stock be reserved for issuance under the 2005
    LTIP, which was approved by stockholders at the Companys
    Annual Meeting on May 3, 2005. Of the total shares
    reserved, 6.3 million shares of the Companys treasury
    stock were retired for this purpose. The remaining
    3.7 million shares, which had been retired in previous
    years from the Companys treasury stock in connection with
    the establishment of the UST Inc. Amended and Restated Stock
    Incentive Plan, the Nonemployee Directors Stock Option
    Plan and the Nonemployee Directors Restricted Stock Award
    Plan, are available for issuance under the 2005 LTIP. As of
    May 3, 2005, all stock-based awards were issued from the
    2005 LTIP, as the UST Inc. Amended and Restated Stock Incentive
    Plan, the Nonemployee Directors Stock Option Plan and the
    Nonemployee Directors Restricted Stock Award Plan are
    considered to be inactive. Forfeitures from these inactive plans
    are transferred into the 2005 LTIP as they occur, and are
    considered available for future issuance under the 2005 LTIP.




Item 13  Certain Relationships and Related
Transactions







Item 14  Principal Accountant Fees and
Services








72




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##### 

10K






PART IV







Item 15  Exhibits and Financial Statement
Schedules

(a) Documents filed as part of this Report:



(1) UST Inc. Schedule II  Valuation and
    Qualifying Accounts For the Years 2005, 2004 and 2003 
     (Dollars in thousands)

|                              |                                    |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|----------------------------- | ---------------------------------- | ---------- | - | ----- | --------- |  | ---------- | ---------- |  |  | ------ | ------- |  |  | - | ----- | 
|                              |                                    |            |  
|                              |                                    | Balance at |   |       |           |  | Balance at |           
|                              |                                    | Beginning  |   |       |           |  | End of     |           
|                              |                                    | of Period  |   |       | Additions |  |            | Deductions |  |  | Period |        
|                              |                                    |            |  
|Year ended December 31, 2005: |                                    |            |   |       |           |  |            |            |  |  |        |         |  |  |   |      
|                              | Deducted from accounts receivable: |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Allowance for doubtful accounts    |            | $ | 513   |           |  | $          | 236        |  |  | $      | (670)   |  |  | $ | 79    | 
|                              | Deducted from inventories:         |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Reserve for inventory obsolescence |            |   | 2,424 |           |  |            | 3,567      |  |  |        | (2,996) |  |  |   | 2,995 | 
|                             
|Year ended December 31, 2004: |                                    |            |   |       |           |  |            |            |  |  |        |         |  |  |   |      
|                              | Deducted from accounts receivable: |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Allowance for doubtful accounts    |            |   | 1,375 |           |  |            | 7          |  |  |        | (869)   |  |  |   | 513   | 
|                              | Deducted from inventories:         |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Reserve for inventory obsolescence |            |   | 7,190 |           |  |            | 4,089      |  |  |        | (8,855) |  |  |   | 2,424 | 
|                             
|Year ended December 31, 2003: |                                    |            |   |       |           |  |            |            |  |  |        |         |  |  |   |      
|                              | Deducted from accounts receivable: |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Allowance for doubtful accounts    |            |   | 834   |           |  |            | 590        |  |  |        | (49)    |  |  |   | 1,375 | 
|                              | Deducted from inventories:         |            |   |       |           |  |            |            |  |  |        |         |  |  |   |       | 
|                              | Reserve for inventory obsolescence |            |   | 3,033 |           |  |            | 5,662      |  |  |        | (1,505) |  |  |   | 7,190 | 



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

10-Q


10-Q


10-Q


S-4


S-4


S-4






73




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##### 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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





74



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##### 

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10.17(a)*  Amendment dated November 3, 2005 to
Agreement, dated September 13, 2004, by and among the
Company, U.S. Smokeless Tobacco Company and Murray S.
Kessler, an Executive Officer, incorporated by reference to
Exhibit 10.2 to
Form 8-K filed
November 8, 2005.

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

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

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

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

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

10.23*  Retention Bonus Agreement, dated
November 3, 2005, by and between the Company and Vincent A.
Gierer, Jr., an Executive Officer, incorporated by
reference to Exhibit 10.1 to
Form 8-K filed
November 8, 2005.

10.24*  Form of Amendment to Option Award Agreement,
dated December 31, 2005, by and between the Company and
certain officers of the Company or its subsidiaries,
incorporated by reference to Exhibit 10.1 to
Form 8-K filed
December 13, 2005.

10.25*  UST Inc. Long-Term Incentive Plan, as amended
and restated effective December 7, 2005, incorporated by
reference to Exhibit 10.2 to
Form 8-K filed
December 13, 2005.

10.26*  Form of Notice of Grant and Restricted Stock
Agreement between the Company and certain officers, incorporated
by reference to Exhibit 10.3 to
Form 8-K filed
December 13, 2005.

10.27*  Form of Notice of Grant and Stock Option
Agreement between the Company and Daniel W. Butler, incorporated
by reference to Exhibit 10.4 to
Form 8-K filed
December 13, 2005.

10.28*  Form of Indemnification Agreement,
incorporated by reference to Exhibit 10.1 to
Form 8-K filed
August 10, 2005.

21  Subsidiaries of UST Inc.

23  Consent of Independent Registered Public
Accounting Firm.

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

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

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





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



75



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##### 

SIGNATURES

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



UST Inc.Date: February 24, 2006

By:
    /s/ VINCENT A. GIERER, JR.Vincent A. Gierer, Jr.Chairman of the Board andChief Executive OfficerPursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.

|                  |  |                                                                                                   |  |                                                             
|----------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------
|February 24, 2006 |  | Director, Chairman of the Board
    and Chief Executive Officer
    (Principal Executive Officer) |  | /s/
    VINCENT A. GIERER, JR.Vincent
    A. Gierer, Jr.    
|                 
|February 24, 2006 |  | Director, President and
    Chief Operating Officer                                               |  | /s/
    MURRAY S. KESSLERMurray
    S. Kessler              
|                 
|February 24, 2006 |  | Senior Vice President
    and Chief Financial Officer
    (Principal Financial Officer)           |  | /s/
    ROBERT T.
    DALESSANDRORobert
    T. DAlessandro
|                 
|February 24, 2006 |  | Vice President and
    Controller (Principal Accounting Officer)                                  |  | /s/
    JAMES D. PATRACUOLLAJames
    D. Patracuolla        
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    JOHN D. BARRJohn
    D. Barr                        
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    JOHN P. CLANCEYJohn
    P. Clancey                  
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    EDWARD H. DEHORITY, JR.Edward
    H. DeHority, Jr.  
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    PATRICIA DIAZ DENNISPatricia
    Diaz Dennis        
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    JOSEPH E. HEIDJoseph
    E. Heid                    
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    PATRICK J. MANNELLYPatrick
    J. Mannelly          
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    PETER J. NEFFPeter
    J. Neff                      
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    ANDREW J. PARSONSAndrew
    J. Parsons              
|                 
|February 24, 2006 |  | Director                                                                                          |  | /s/
    RONALD J. ROSSIRonald
    J. Rossi                  





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