##### Table of Contents

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, 2006                                             
|          
|OR        
|          
|[ ]        |  | TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             



UST Inc.




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





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


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

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












S-K 10-K 10-K.


12b-2




12b-2






DOCUMENTS INCORPORATED BY REFERENCE









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##### 

FORM 10-K

TABLE OF CONTENTS

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|PART I                                                         
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|Item 1.                                                         |  | Business                                                                                                             |    |      | 3  | 
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|Item 1A.                                                        |  | Risk
    Factors                                                                                                     |    |      | 7  | 
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|Item 1B.                                                        |  | Unresolved
    Staff Comments                                                                                        |    |      | 12 | 
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|Item 2.                                                         |  | Properties                                                                                                           |    |      | 12 | 
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|Item 3.                                                         |  | Legal
    Proceedings                                                                                                |    |      | 12 | 
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|Item 4.                                                         |  | Submission of
    Matters to a Vote of Security Holders                                                              |    |      | 14 | 
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|PART II                                                        
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|Item 5.                                                         |  | Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities |    |      | 15 | 
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|Item 6.                                                         |  | Selected
    Financial Data                                                                                          |    |      | 17 | 
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|Item 7.                                                         |  | Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                        |    |      | 18 | 
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|Item 7A.                                                        |  | Quantitative
    and Qualitative Disclosures about Market Risk                                                       |    |      | 49 | 
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|Item 8.                                                         |  | Financial
    Statements and Supplementary Data                                                                      |    |      | 51 | 
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|Item 9.                                                         |  | Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure                         |    |      | 90 | 
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|Item 9A.                                                        |  | Controls and
    Procedures                                                                                          |    |      | 90 | 
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|Item 9B.                                                        |  | Other
    Information                                                                                                |    |      | 90 | 
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|PART III                                                       
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|Item 10.                                                        |  | Directors,
    Executive Officers and Corporate Governance                                                           |    |      | 90 | 
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|Item 11.                                                        |  | Executive
    Compensation                                                                                           |    |      | 92 | 
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|Item 12.                                                        |  | Security
    Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters               |    |      | 92 | 
|                                                               
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|Item 13.                                                        |  | Certain
    Relationships and Related Transactions, and Director
    Independence                                    |    |      | 93 | 
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|Item 14.                                                        |  | Principal
    Accountant Fees and Services                                                                           |    |      | 93 | 
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|PART IV                                                        
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|Item 15.                                                        |  | Exhibits and
    Financial Statement Schedules                                                                       |    |      | 94 | 
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|Signatures                                                      |  |                                                                                                                      | 98 |     
|EX-10.26: AMENDMENT TO THE LONG-TERM INCENTIVE PLAN            
|EX-21: SUBSIDIARIES OF UST INC                                 
|EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|EX-31.1: CERTIFICATION                                         
|EX-31.2: CERTIFICATION                                         
|EX-32: CERTIFICATION                                           





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##### Table of Contents

10K






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, and imports and distributes wines
    from Italy.All Other Operations: The Companys
    international operations, which market moist smokeless tobacco,
    are 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 (SEC). A free
copy of these materials can also be requested via correspondence
addressed to the Secretary at UST Inc., 100 West Putnam
Avenue, Greenwich, Connecticut 06830. The public may read and
copy any materials the Company has filed with the SEC at the
SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may also obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC
maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information
regarding issuers, including the Company, that file
electronically with the SEC.

Operating Segment Data

The Company hereby incorporates by reference the consolidated
Segment Information pertaining to the years 2004 through 2006
set forth herein in Part II, Item 8, Notes to
Consolidated Financial Statements  Note 16,
Segment Information.





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##### Table of Contents

SMOKELESS TOBACCO PRODUCTS

Principal Products

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

|       |  |                                                
|------ |  | -----------------------------------------------
|      
|      
|      
|      
|Moist: |  | COPENHAGEN, SKOAL, RED
    SEAL, HUSKY, ROOSTER
|      
|      
|      
|      
|Dry:   |  | BRUTON, CC, RED
    SEAL                       







inter alia,






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##### Table of Contents

10K


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, adult 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 percent 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 or
the FETRA) 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 2006, 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 has favorably impacted the
Companys cost of leaf tobacco purchases since its
enactment. Grower contracting for the 2007 tobacco buying season
is not yet complete; however, the Company believes that costs
incurred for leaf tobacco purchases will approximate those
incurred in 2006.



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##### Table of Contents

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 34 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 17 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;
however, in 2006, a major cigarette company entered the
smokeless tobacco category through its acquisition of one of the
Companys competitors. In addition, certain cigarette
companies have begun test marketing smokeless tobacco products
and have indicated the intent to continue to expand this
activity. 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. In addition, the
Company produces and markets two California premium wines under
the labels of VILLA MT. EDEN and CONN CREEK and Oregon premium
wines under the ERATH label. The Company is also the exclusive
United States importer and distributor of the portfolio of wines
produced by the Italian winemaker Antinori, which includes such
labels as TIGNANELLO, SOLAIA, TORMARESCA, MONTENISA and HARAS DE
PIRQUE. Approximately 50 percent of the Companys wine
segment gross sales are made to two distributors, with one of
these distributors accounting for approximately 36 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 such 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 alcohol 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 2007. 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 2007. The Company is
unable to assess the future effects these regulatory and other
actions may have on the sale of its wines.



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10K


The Company uses grapes harvested from its own vineyards, as
well as grapes purchased from independent growers located in
Washington, California and Oregon and purchases bulk wine from
other sources. Total grape tonnage harvested and purchased in
2006 is adequate to meet expected demand.

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

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 2006 was
5,008.

Trademarks and Patents

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

Seasonal Business

No material portion of the business of any operating segment of
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 included in Part II,
Item 7 of this
Form 10-K.




    The Companys product sales and results of operations
    are subject to economic conditions and other factors beyond the
    Companys control. In addition, such conditions and other
    factors could affect the timing or amount of anticipated cost
    savings related to Project Momentum.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, general 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



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##### Table of Contents

manufacturing such products and the excise taxes payable. Sales
volumes of the Companys smokeless tobacco products,
particularly premium products, may be impacted by fluctuations
in gasoline prices, which have a direct impact on adult consumer
disposable income. The impact of fluctuations in gasoline prices
on smokeless tobacco product sales volume may be exacerbated due
to the fact that a significant amount of the Companys
products are sold at locations which also sell gasoline. The
Companys quarterly results may also be affected by
wholesaler order patterns. Many of these factors are beyond the
control of the Company which makes results of operations
difficult to predict.

In addition, the Companys ability to achieve its results
of operations target is tied in part to successful
implementation of its cost reduction initiative, called Project
Momentum, which is designed to create additional resources for
growth via operational, productivity and efficiency
enhancements. Project Momentum, which commenced during the third
quarter of 2006, is expected to result in targeted savings of at
least $100 million over its first three years. While the
Company believes its targeted cost reductions will be achieved,
the Company cannot guarantee the success of the initiative. If
Project Momentum is not successful, the Companys results
of operations could be adversely affected.




    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, or its
suppliers or vendors, 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.




    Company product sales are subject to customer
    concentration risk.Over the past three years, sales to one customer in the
Smokeless Tobacco segment have averaged approximately
16.6 percent of annual Smokeless Tobacco segment sales,
while sales to two customers in the Wine segment have averaged
46.9 percent of annual Wine segment sales. No other
customer accounted for 10 percent or more of Smokeless
Tobacco segment or Wine segment sales over the three-year
period. The loss of any of these customers, or a significant
decline in sales orders from any of these customers, could have
an adverse affect on the Companys results of operations or
financial condition.




    Ingredient or product adulteration could harm the
    integrity and quality of the Companys products, which
    could negatively impact consumer perception of the
    Companys brands and have an adverse effect on the sale of
    the Companys products.The success of the Companys brands is dependent upon the
quality of those brands and the positive perception that
consumers have of such brands. Adulteration, whether arising
accidentally or through deliberate third party action, could
harm the quality of the Companys products and may result
in reduced sales of the affected products, or have an adverse
ancillary effect on the Companys other products, which
could have an adverse affect on the Companys results of
operations or financial condition.




    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 new entrants into the
    marketplace.The Company faces significant competition in the smokeless
tobacco category, both from existing category competitors and
new entrants, which may reduce its market share and put pressure
on its gross margins. The Companys premium unit volume
trends have recently improved, with a shift from declining
premium net unit volume to modest growth; however, its premium
net unit volume growth rate still lags the growth rate of the
overall smokeless tobacco category. The Company recognizes the
need to continue to expand the smokeless category, strengthen
brand loyalty and develop innovative products to ensure
continued growth in its results of operations.

The Company has been implementing plans which 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.



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10K


In light of the growth of price-value products, the Company has
also been implementing plans to increase sales volume of its
premium brands by building and strengthening premium brand
loyalty through various promotional programs, including
implementation of price-based programs to provide improved value
in price sensitive areas of the United States, and through the
introductions of new, differentiated premium products. 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 strategy is not successful,
total premium unit volume may decline and results of operations
could be adversely affected.

In 2006, a major cigarette company entered the smokeless tobacco
category through its acquisition of one of the Companys
competitors. In addition, certain cigarette companies have begun
test marketing smokeless tobacco products and have indicated the
intent to continue to expand this activity. If smokers continue
to switch from cigarettes to smokeless tobacco products, these
competitors may strengthen their presence in the smokeless
tobacco category, or other competitors with substantial
resources may test or enter the smokeless tobacco category and
introduce new products that are designed to compete directly
with the Companys products. While there is the possibility
that such actions may have the effect of expanding the smokeless
tobacco category, which could be beneficial to the Company, it
is also possible that such actions 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
actions may have on the Company and its results of operations.




    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
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.




    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 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 FDA), 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, adult sampling bans or restrictions, tax stamping,
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.



9



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##### Table of Contents

Proposals for comprehensive federal regulation of tobacco
products will continue to be considered. The Company is not
opposed to FDA regulation that addresses public health concerns
and takes into account the distinct differences between
smokeless tobacco and cigarettes while permitting the Company to
continue to communicate responsibly with tobacco-interested
adults and responsibly manufacture, market and sell quality
smokeless tobacco products to adult consumers.

In addition to increased regulatory restrictions, the Company is
subject to various marketing and advertising restrictions under
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.

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 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
inequitable 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 Company has ongoing payment obligations under the Fair
    and Equitable Tobacco Reform Act, the STMSA and other state
    settlement agreements.In 2006, the Company incurred expenses of approximately
$3.2 million, $16.7 million and $4.3 million
under the FETRA, the STMSA and other state settlement
agreements, respectively. The Company presently expects to
continue to incur expenses under the 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
the 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 the FETRA.




    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



10



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10K


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 brought by one of the
Companys competitors, Conwood Company L.P. (Conwood
Litigation), 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. Further, the Company has
been served in a purported class action attempting to challenge
certain aspects of a settlement agreement reached with indirect
purchasers in multiple states and seeking additional amounts
purportedly consistent with subsequent settlements of similar
actions, estimated by plaintiffs to be between $8.9 million
and $214.2 million, as well as punitive damages and
attorneys fees. 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, with the exception of a purported class action in the
State of Pennsylvania, for which the Company believes there is
insufficient basis for such a claim. 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.




    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, through contracts with independent growers,
sufficient regular supplies of high quality grapes, it cannot be
certain that grape supply shortages will not occur. As grapes
grown in the State of Washington account for approximately
95 percent of the Companys harvested and contracted
grapes, if eastern Washington state experiences adverse weather
conditions, widespread vine disease or other crop damage, fruit
availability may be compromised, quality may be negatively
impacted and production costs may increase. 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.



11



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##### Table of Contents


    The Companys wine business may be negatively
    impacted by an increase in excise taxes or governmental
    regulations related to the alcohol beverages.Significant increases in excise or other taxes on alcohol
beverages could adversely affect sales of the Companys
wine products. Federal, state and local governmental agencies
regulate the alcohol beverage industry through various means,
including licensing requirements, pricing, labeling and
advertising restrictions, and distribution and production
policies. New regulations, or revisions to existing regulations,
resulting in further restrictions or taxes on the manufacture
and sale of alcohol beverages may have an adverse affect on the
Companys wine business.





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, 2006 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, one in
California and one in Oregon. In addition, it owns and operates
vineyards in Washington state and California.





Item 3  Legal Proceedings

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

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

Smokeless Tobacco Litigation

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. The actions for three of these individuals
have been dismissed; one in September 2006 which was dismissed
without prejudice and two in October 2006 which were dismissed
with prejudice. All three remaining 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



12



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10K


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 is named as a defendant in a number of purported
class actions, as well as class actions in the states of
California, Massachusetts and Wisconsin. On February 27,
2006, the Company was served with a Summons and
Class Action Complaint in an action entitled Gregory
Hunt, et al. v. United States Tobacco Company,
et al., United States District Court for the Eastern
District of Pennsylvania (Case
No. 06-CV-1099).
Each of these actions are brought by indirect purchasers
(consumers and retailers) of the Companys smokeless
tobacco products during various periods of time ranging from
January 1990 to the date of certification or potential
certification of the proposed class. Plaintiffs in those actions
allege that, individually and on behalf of putative class
members in a particular state or individually and on behalf of
class members in the states of California, 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 per class
member, or per putative class member, and certain other relief.
The indirect purchaser actions are similar in all material
respects.

The Company has entered into a settlement with indirect
purchasers, which has been approved by the court, 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
approved Settlement, adult consumers 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, with the exception of Pennsylvania, for which the
Company believes there is insufficient basis for such a claim.

On March 8, 2006, the court entered final approval of the
settlement of the Kansas class action and New York action. An
evidentiary hearing on plaintiffs motion for an additional
amount of approximately $8.5 million in attorneys
fees, expenses and costs, plus interest, beyond the previously
agreed-upon amounts already paid by the Company was held April
4-5, 2006. To date, the court has not ruled on the motion. The
Company believes, and has been so advised by counsel handling
this case, that it has meritorious defenses in this regard, and
will continue to vigorously defend against this motion. (See
Form 10-Q for the
period ended September 30, 2005 for additional information.)

In Robert A. Martin, et al. v. Gordon Ball,
et al., United States District Court for the Northern
District of West Virginia (No. 5:06-CV-85), the Company
deemed service of the complaint to have been effective as of
July 17, 2006 and filed an Answer. This action was brought
by fifteen individual plaintiffs on behalf of themselves and a
purported class of persons who filed claims for coupons as part
of the Companys settlement of the action



13



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##### Table of Contents

entitled Philip Edward Davis, et al. v. United
States Tobacco Company, et al., Circuit Court of
Jefferson County, Tennessee. The Martinplaintiffs allege
that the Company breached the Settlement Agreement in the
Davisaction, and has been unjustly enriched, because it
failed to distribute to each of the purported class members a
denomination of coupons with an aggregate value equal to the
aggregate value of the coupons distributed as part of the
settlement in another indirect purchaser action. Plaintiffs also
allege claims for breach of fiduciary duty, unjust enrichment,
and conversion against the counsel who represented the class
members in the Davisaction. Plaintiffs seek additional
amounts purportedly consistent with subsequent settlements of
similar actions, estimated by plaintiffs to be between
$8.9 million and $214.2 million, as well as punitive
damages and attorneys fees.

Each of the foregoing actions is derived directly from the
previous antitrust action brought against the Company by a
competitor, Conwood Company L.P. For the plaintiffs in the
putative class actions to prevail, they will have to obtain
class certification. The plaintiffs in the above actions also
will have to obtain favorable determinations on issues relating
to liability, causation and damages. The Company believes, and
has been so advised by counsel handling these cases, that it has
meritorious defenses in this regard, and they are, and will
continue to be, vigorously defended.

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 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, the foregoing case is, and will continue to be,
vigorously defended.





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

Not applicable.





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PART II







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

Market for Registrants Common Equity

The Companys common stock is listed on the New York Stock
Exchange (NYSE) under the symbol UST. As of
January 31, 2007, there were approximately 7,065
stockholders of record of the Companys common stock. The
table below sets forth the high and low sales prices per share
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 2006 and 2005. The
Company has paid cash dividends without interruption since 1912.
While the Company expects to continue its policy of paying cash
dividends in the future, such policy is subject to annual review
and approval by the Companys Board of Directors. Factors
that are taken into consideration with regard to the level of
dividend payments include the Companys net earnings,
capital requirements and financial condition.

|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- |  | --------- | ----- | ---- |  | --- | ---- | --------- |  | - | ----- |  |  | - | ----- |  |  | - | ---- | 
|               |  | 2006 |       | 2005
|               |  |      |       |     
|               |  | High |       | Low  |  | Dividends |       | High |  | Low |      | Dividends
|               |  |      |       |     
|First Quarter  |  | $    | 43.14 |      |  | $         | 37.96 |      |  | $   | 0.57 |           |  | $ | 56.90 |  |  | $ | 47.71 |  |  | $ | 0.55 | 
|              
|              
|              
|              
|Second Quarter |  |      | 45.78 |      |  |           | 41.10 |      |  |     | 0.57 |           |  |   | 54.85 |  |  |   | 42.90 |  |  |   | 0.55 | 
|              
|              
|              
|              
|Third Quarter  |  |      | 55.06 |      |  |           | 44.61 |      |  |     | 0.57 |           |  |   | 47.62 |  |  |   | 39.81 |  |  |   | 0.55 | 
|              
|              
|              
|              
|Fourth Quarter |  |      | 59.49 |      |  |           | 52.34 |      |  |     | 0.57 |           |  |   | 42.50 |  |  |   | 37.59 |  |  |   | 0.55 | 
|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|Year           |  | $    | 59.49 |      |  | $         | 37.96 |      |  | $   | 2.28 |           |  | $ | 56.90 |  |  | $ | 37.59 |  |  | $ | 2.20 | 
|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 






15







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##### Table of Contents

Performance Graph

The following graph compares the total returns for an investment
in the Companys common stock over the last five years to
the Standard and Poors (S&P) 500 Stock
Index and the S&P Tobacco Index assuming a $100 investment
made on December 31, 2001. Each of the three measures of
cumulative total return assumes reinvestment of dividends. The
stock performance shown on the graph below is not necessarily
indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among UST Inc., The S&P 500 Index

And The S&P Tobacco Index

(GRAPH)

|              |  |              |        |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |  |  |   |        | 
|------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|              |  | December 31,
|              |  |             
|              |  | 2001         |        | 2002 |  | 2003 |        | 2004 |  | 2005 |        | 2006
|              |  |             
|UST Inc.      |  | $            | 100.00 |      |  | $    | 101.02 |      |  | $    | 114.47 |      |  | $ | 162.74 |  |  | $ | 145.16 |  |  | $ | 217.06 | 
|             
|             
|             
|             
|S & P 500     |  |              | 100.00 |      |  |      | 77.90  |      |  |      | 100.24 |      |  |   | 111.15 |  |  |   | 116.61 |  |  |   | 135.03 | 
|             
|             
|             
|             
|S & P Tobacco |  |              | 100.00 |      |  |      | 93.20  |      |  |      | 131.67 |      |  |   | 157.78 |  |  |   | 197.52 |  |  |   | 241.30 | 

Issuer Purchases of Equity Securities




|                      |  |           |         |          |  |              |       |             |  |  |         |  |  |  |            | 
|--------------------- |  | --------- | ------- | -------- |  | ------------ | ----- | ----------- |  |  | ------- |  |  |  | ---------- | 
|                      |  |           |         |          |  |              |       | 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, 2006  |  |           | 305,500 |          |  | $            | 55.07 |             |  |  | 305,500 |  |  |  | 13,534,052 | 
|                     
|                     
|                     
|                     
|November 1  30, 2006 |  |           | 309,400 |          |  | $            | 54.95 |             |  |  | 309,400 |  |  |  | 13,224,652 | 
|                     
|                     
|                     
|                     
|December 1  31, 2006 |  |           | 281,600 |          |  | $            | 57.33 |             |  |  | 281,600 |  |  |  | 12,943,052 | 
|                      |  |           |         |          |  |             
|Total                 |  |           | 896,500 |          |  | $            | 55.74 |             |  |  | 896,500 |  |  |  |            | 
|                      |  |           |         |          |  |             



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



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10K






Item 6  Selected Financial Data

CONSOLIDATED SELECTED FINANCIAL DATA  FIVE
YEARS

(Dollars in thousands, except per share amounts)

|                                                         |                                                                              |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |           |       |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------------------------------------------- | - | --------- | ----- | ---- | - | --------- | ----- | ---- | - | --------- | ----- | - | - | --------- | ----- | - | - | --------- | ----- | -
|                                                         |                                                                              |                                               
|                                                         |                                                                              | 2006                                           |   | 2005      |       | 2004 |   | 2003      |       | 2002
|                                                         |                                                                              |                                               
|Summary of Operations For the
    Year Ended December 31 |                                                                              |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net sales                                                                    |                                                | $ | 1,850,911 |       |      | $ | 1,851,885 |       |      | $ | 1,838,238 |       |   | $ | 1,731,862 |       |   | $ | 1,674,403 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cost of products sold (includes
    excise taxes)                            |                                                |   | 466,088   |       |      |   | 443,131   |       |      |   | 412,641   |       |   |   | 384,487   |       |   |   | 358,931   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Selling, advertising and
    administrative expenses                         |                                                |   | 525,990   |       |      |   | 518,797   |       |      |   | 513,570   |       |   |   | 470,740   |       |   |   | 447,709   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Restructuring charges                                                        |                                                |   | 21,997    |       |      |   |          |       |      |   |          |       |   |   |          |       |   |   |          |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Antitrust litigation                                                         |                                                |   | 2,025     |       |      |   | 11,762    |       |      |   | (582      | )     |   |   | 280,000   |       |   |   | 1,260,510 |      
|                                                         |                                                                              |                                               
|                                                         | Operating income (loss)                                                      |                                                |   | 834,811   |       |      |   | 878,195   |       |      |   | 912,609   |       |   |   | 596,635   |       |   |   | (392,747  | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest, net                                                                |                                                |   | 41,785    |       |      |   | 50,578    |       |      |   | 75,019    |       |   |   | 76,905    |       |   |   | 46,146    |      
|                                                         |                                                                              |                                               
|                                                         | Earnings (loss) from continuing
    operations before income taxes           |                                                |   | 793,026   |       |      |   | 827,617   |       |      |   | 837,590   |       |   |   | 519,730   |       |   |   | (438,893  | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Income tax expense (benefit)                                                 |                                                |   | 291,060   |       |      |   | 293,349   |       |      |   | 299,538   |       |   |   | 197,681   |       |   |   | (170,980  | )    
|                                                         |                                                                              |                                               
|                                                         | Earnings (loss) from continuing
    operations                               |                                                |   | 501,966   |       |      |   | 534,268   |       |      |   | 538,052   |       |   |   | 322,049   |       |   |   | (267,913  | )    
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Income (loss) from discontinued
    operations (including income tax effect) |                                                |   | 3,890     |       |      |   |          |       |      |   | (7,215    | )     |   |   | (3,260    | )     |   |   | (3,556    | )    
|                                                         |                                                                              |                                               
|                                                         | Net earnings (loss)                                                          |                                                | $ | 505,856   |       |      | $ | 534,268   |       |      | $ | 530,837   |       |   | $ | 318,789   |       |   | $ | (271,469  | )    
|                                                         |                                                                              |                                               
|Per Share Data                                           |                                                                              |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net earnings (loss) per basic share:                                         |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |           |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | Earnings (loss) from continuing
    operations |   | $         | 3.13  |      |   | $         | 3.26  |      |   | $         | 3.26  |   |   | $         | 1.93  |   |   | $         | (1.59 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | Income (loss) from discontinued
    operations |   |           | 0.02  |      |   |           |      |      |   |           | (0.05 | ) |   |           | (0.02 | ) |   |           | (0.02 | )
|                                                         |                                                                              |                                               
|                                                         | Net earnings (loss) per basic share                                          |                                                |   | 3.15      |       |      |   | 3.26      |       |      |   | 3.21      |       |   |   | 1.91      |       |   |   | (1.61     | )    
|                                                         |                                                                              |                                               
|                                                         | Net earnings (loss) per diluted
    share:                                   |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |           |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | Earnings (loss) from continuing
    operations |   |           | 3.10  |      |   |           | 3.23  |      |   |           | 3.23  |   |   |           | 1.92  |   |   |           | (1.59 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | Income (loss) from discontinued
    operations |   |           | 0.02  |      |   |           | -    |      |   |           | (0.04 | ) |   |           | (0.02 | ) |   |           | (0.02 | )
|                                                         |                                                                              |                                               
|                                                         | Net earnings (loss) per diluted
    share                                    |                                                | $ | 3.12      |       |      | $ | 3.23      |       |      | $ | 3.19      |       |   | $ | 1.90      |       |   | $ | (1.61     | )    
|                                                         |                                                                              |                                               
|                                                         | Dividends per share                                                          |                                                | $ | 2.28      |       |      | $ | 2.20      |       |      | $ | 2.08      |       |   | $ | 2.00      |       |   | $ | 1.92      |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Market price per share:                                                      |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |           |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | High                                           |   | $         | 59.49 |      |   | $         | 56.90 |      |   | $         | 48.97 |   |   | $         | 37.79 |   |   | $         | 41.35 |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                              | Low                                            |   |           | 37.96 |      |   |           | 37.59 |      |   |           | 34.00 |   |   |           | 26.73 |   |   |           | 25.30 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Financial Condition at
    December 31                   |                                                                              |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash and cash equivalents                                                    |                                                | $ | 254,393   |       |      | $ | 202,025   |       |      | $ | 450,202   |       |   | $ | 433,040   |       |   | $ | 382,003   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current assets                                                               |                                                |   | 998,110   |       |      |   | 889,554   |       |      |   | 1,173,133 |       |   |   | 1,247,966 |       |   |   | 2,291,267 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current liabilities                                                          |                                                |   | 300,077   |       |      |   | 258,778   |       |      |   | 618,873   |       |   |   | 521,093   |       |   |   | 1,462,442 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Working capital                                                              |                                                |   | 698,033   |       |      |   | 630,776   |       |      |   | 554,260   |       |   |   | 726,873   |       |   |   | 828,825   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Ratio of current assets to current
    liabilities                           |                                                |   | 3.3:1     |       |      |   | 3.4:1     |       |      |   | 1.9:1     |       |   |   | 2.4:1     |       |   |   | 1.6:1     |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Total assets                                                                 |                                                |   | 1,440,348 |       |      |   | 1,366,983 |       |      |   | 1,659,483 |       |   |   | 1,726,494 |       |   |   | 2,765,275 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Long-term debt                                                               |                                                |   | 840,000   |       |      |   | 840,000   |       |      |   | 840,000   |       |   |   | 1,140,000 |       |   |   | 1,140,000 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Total debt                                                                   |                                                |   | 840,000   |       |      |   | 840,000   |       |      |   | 1,140,000 |       |   |   | 1,140,000 |       |   |   | 1,140,000 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Stockholders equity (deficit)                                               |                                                |   | 65,826    |       |      |   | 75,098    |       |      |   | 9,565     |       |   |   | (115,187  | )     |   |   | (46,990   | )    
|                                                        
|                                                        
|                                                        
|                                                        
|Other Data                                               |                                                                              |                                                |   |           |       |      |   |           |       |      |   |           |       |   |   |           |       |   |   |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Stock repurchased                                                            |                                                | $ | 200,003   |       |      | $ | 200,038   |       |      | $ | 200,031   |       |   | $ | 150,095   |       |   | $ | 50,262    |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Dividends paid                                                               |                                                | $ | 367,499   |       |      | $ | 361,208   |       |      | $ | 344,128   |       |   | $ | 322,986   |       |   | $ | 324,233   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Dividends paid as a percentage of
    net earnings                           |                                                |   | 72.6      | %     |      |   | 67.6      | %     |      |   | 64.8      | %     |   |   | 104.5     | %     |   |   | N/M       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Return on net sales                                                          |                                                |   | 27.3      | %     |      |   | 28.8      | %     |      |   | 28.9      | %     |   |   | 18.4      | %     |   |   | N/M       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Return on average assets                                                     |                                                |   | 36.0      | %     |      |   | 35.3      | %     |      |   | 31.4      | %     |   |   | 14.2      | %     |   |   | N/M       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Average number of shares (in
    thousands)  basic                          |                                                |   | 160,772   |       |      |   | 163,949   |       |      |   | 165,164   |       |   |   | 166,572   |       |   |   | 168,786   |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Average number of shares (in
    thousands)  diluted                        |                                                |   | 162,280   |       |      |   | 165,497   |       |      |   | 166,622   |       |   |   | 167,376   |       |   |   | 168,786   |      

N/ M: Not meaningful due to net loss.


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




17







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##### Table of Contents

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

UST INC.

MANAGEMENTS DISCUSSION AND ANALYSIS
(MD&A)

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. In
MD&A, 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 the
Cautionary Statement Regarding Forward-Looking
Information section presented at the end of MD&A. 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.

Introduction

MD&A is provided as a supplement to the accompanying
consolidated financial statements and notes thereto, to assist
individuals in their review of such statements. MD&A has
been organized as follows:


    OVERVIEW  This section provides a general
    description of the Companys overall business, a
    description of the Companys business segments and a
    high-level summary of the Companys consolidated financial
    results for the most recently completed fiscal year.
    RESULTS OF OPERATIONS  This section provides
    an analysis of the Companys results of operations for the
    three years ended December 31, 2006. This section is
    organized using a layered approach, beginning with a discussion
    of consolidated results at a summary level, followed by more
    detailed discussions of business segment results and unallocated
    corporate items, including interest and income taxes.
    OUTLOOK  This section provides information
    regarding the Companys current expectations, mainly with
    regard to the next fiscal year. This section is organized to
    provide information by business segment and on a consolidated
    basis.
    LIQUIDITY AND CAPITAL RESOURCES  This section
    provides an analysis of the Companys financial condition,
    including cash flows for the three years ended December 31,
    2006, the Companys sources of liquidity, capital
    expenditures, debt outstanding, share repurchase programs and
    dividends paid on the Companys common stock and the
    Companys aggregate contractual obligations as of
    December 31, 2006.
    OFF-BALANCE SHEET ARRANGEMENTS  This section
    provides information regarding any off-balance sheet
    arrangements that are material to the Companys results of
    operations or financial condition.
    CRITICAL ACCOUNTING POLICIES AND ESTIMATES 
    This section discusses accounting policies that are considered
    by the Company to be significant to the Companys financial
    condition and results of operations, require significant
    judgment and require estimates on the part of management in
    application.
    NEW ACCOUNTING STANDARDS  This section
    provides information regarding any newly issued accounting
    standards which have not yet been adopted by the Company.OVERVIEW

BUSINESS

UST Inc. is a holding company for its wholly-owned subsidiaries:
U.S. Smokeless Tobacco Company and International
Wine & Spirits Ltd. U.S. Smokeless Tobacco Company
is a leading manufacturer and marketer of moist smokeless
tobacco products including brands such as Copenhagen, Skoal, Red
Seal and Husky. International Wine & Spirits Ltd.,
through its Ste. Michelle Wine Estates subsidiary, produces
and markets premium wines sold nationally under labels such as
Chateau Ste. Michelle, Columbia Crest, Red Diamond,
14 Hands and Snoqualmie. In the third quarter of 2006,
through an acquisition, the Company added the Erath label to its
portfolio of premium wines. The Company also produces and
markets sparkling wine under the



18



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##### Table of Contents

10K


Domaine Ste. Michelle label. In addition, the Company is
the exclusive United States importer and distributor of the
portfolio of wines produced by the Italian winemaker Antinori,
which includes such labels as Tignanello, Solaia, Tormaresca,
Montenisa and Haras de Pirque.

The Company conducts its business principally in the United
States, and its 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.

SMOKELESS TOBACCO SEGMENT

Category Growth

The Companys primary objective in the Smokeless Tobacco
segment is to continue to grow the moist smokeless tobacco
category by building awareness and social acceptability of
smokeless tobacco products among adults, with a secondary
objective of being competitive in every segment of the moist
smokeless tobacco category. Over the past several years,
industry trends have shown that some adult consumers 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, to the smokeless tobacco
category, as approximately every one percent of adult smokers
who convert to moist smokeless tobacco represents a
7 percent to 8 percent increase in the categorys
adult consumer base, and consumer research indicates that the
majority of new adult consumers enter the category in the
premium segment.

In addition to advertising initiatives focused on category
growth, the Company has utilized its direct mail marketing
program to promote the discreetness and convenience of smokeless
tobacco relative to cigarettes to over four million adult
smokers. The direct mail program, which the Company believes has
been successful over the past two years, continued during 2006
and the Company intends to continue the program in 2007. Also
crucial to the success of the Smokeless Tobacco segments
category growth initiatives is product innovation, as evidenced
by the contribution that new products have made to the Smokeless
Tobacco segments results over the past several years.

Premium Brand Loyalty

While category growth remains the Companys priority, it
has significantly increased its focus on efforts to increase
adult consumer loyalty within the premium segment of the moist
smokeless tobacco category. In connection with these efforts,
during 2006 the Company implemented a plan under which it
incurred significant incremental spending to stabilize premium
net unit volume by strengthening premium brand loyalty. The
premium brand loyalty plan is designed to deliver value to adult
consumers through promotional spending and other price-focused
initiatives implemented on a state-by-state basis. Based on
sequential trend improvements in net unit volume for premium
products throughout 2006, the Company believes the premium brand
loyalty efforts have proven successful and, therefore, intends
to build upon this success by increasing spending above 2006
levels on such initiatives during 2007, with the goal of growing
underlying premium net unit volume approximately one percent in
2007.

WINE SEGMENT

The Companys focus in the Wine segment is to become one of
the premier fine wine companies of the world, to elevate
Washington state wines to the quality and prestige of the top
regions of the world, and to be known for superior products,
innovation and customer focus. In order to achieve these goals,
attention is directed towards traditional style wines in the
super premium to luxury-priced categories. Achievements in 2006
were well aligned with these goals. According to ACNielsen, in
2006, the Companys wines comprised 6.2 percent of
total domestic 750ml units; in 2005, such share was
5.9 percent. The alliance with Antinori, to become its
exclusive United States importer and distributor, and the
purchase of the Erath label and winery broadened the Wine
segments position with respect to the two key wine regions
represented by Antinori and Erath. The addition of the Italian
wines positions the Wine segment as a leader in
U.S. distribution of Tuscan wines, while the addition of
Erath establishes the Companys Wine segment as one of the
largest producers of Oregon Pinot Noir. The Company continued to
be the category leader for Riesling; comprising 30 percent
of the



19



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##### Table of Contents

Managements Discussion and Analysis(Continued)

market based on ACNielsen data. Overall, the Wine segment
maintained its strong leadership position in Washington state.

Recent ACNielsen wine industry data indicate that full-year 2006
case volume for the Companys wines grew approximately
17 percent compared to 2005, outpacing industry-wide
domestic case volume growth for 750ml varietals of approximately
13 percent during the same period, reflecting expanded
distribution of the Companys wines. The Company remains
focused on the continued expansion of its sales force and
category management staff to further broaden the distribution of
its wines in the domestic market, especially in certain account
categories such as restaurants, wholesale chains and mass
merchandisers. Sustained growth in the Wine segment will also be
dependent on third party acclaim and ongoing category growth.

CONSOLIDATED

The Companys results for 2006, while lower than 2005,
reflected the impact of the strategic initiatives undertaken in
2006. Net sales and net earnings declined in 2006, tracing to
the previously announced incremental costs incurred in the
Smokeless Tobacco segment to stabilize premium net unit volume
by strengthening premium brand loyalty and on additional
category growth initiatives. These efforts produced the desired
effect, as premium net unit volume for moist smokeless tobacco
products stabilized for the full year in 2006, as compared to
the prior year, and increased 1.7 percent during the fourth
quarter of 2006, as compared to the comparative prior year
period. In addition, during the third quarter of 2006, the
Company commenced implementation of a cost-reduction initiative
called Project Momentum, with targeted savings of at
least $100 million over its first three years. Results for
2006 also reflect the impact of restructuring charges incurred
in connection with Project Momentum. The Company believes that
such an effort is prudent from a long-term growth perspective,
as it is designed to provide additional financial flexibility in
the increasingly competitive smokeless tobacco category. Results
for 2006 were favorably impacted by the performance of the Wine
segment, which once again had record net sales and operating
profit. The results of 2006 also reflected increased net sales
and operating income from All Other Operations.

Discussion of the Companys plans and initiatives in the
Smokeless Tobacco and Wine segments is included in the
Outlook section of MD&A.

RESULTS OF OPERATIONS

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

CONSOLIDATED RESULTS

2006 compared with 2005

|                           |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|-------------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                           |  | Year Ended   |           | Increase/ 
|                           |  | December 31, |           | (Decrease)
|                           |  |              |           |           
|                           |  | 2006         |           | 2005       |  | Amount |           | %
|                           |  |             
|                          
|                          
|                          
|                          
|Net sales                  |  | $            | 1,850,911 |            |  | $      | 1,851,885 |   |  | $ | (974    | ) |  |  | (0.1 | )
|                          
|                          
|                          
|                          
|Net earnings               |  |              | 505,856   |            |  |        | 534,268   |   |  |   | (28,412 | ) |  |  | (5.3 | )
|                          
|                          
|                          
|                          
|Basic earnings per share   |  |              | 3.15      |            |  |        | 3.26      |   |  |   | (0.11   | ) |  |  | (3.4 | )
|                          
|                          
|                          
|                          
|Diluted earnings per share |  |              | 3.12      |            |  |        | 3.23      |   |  |   | (0.11   | ) |  |  | (3.4 | )

Net Earnings






20







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##### Table of Contents

10K


dated net sales, compared to operating income of
$878.2 million, or 47.4 percent of consolidated net
sales, in 2005. The decrease in operating income was primarily
due to the following:


    Lower net revenue realization per premium unit in the Smokeless
    Tobacco segment;
    Increased costs of products sold in the Wine segment, mainly
    related to increased case volume;
    The impact of $22 million in restructuring charges incurred
    in connection with Project Momentum (see Restructuring
    Chargessection below), which adversely impacted the
    operating margin percentage by approximately 1.2 percentage
    points; and,
    Increased selling, advertising and administrative
    (SA&A) expenses.These factors were partially offset by:


    Increased case and net can volume in the Wine and Smokeless
    Tobacco segments, respectively;
    Cost savings realized in connection with Project Momentum, along
    with the intended ancillary benefit derived from an enhanced
    focus on cost containment in other areas; and,
    Lower charges related to certain states indirect purchaser
    antitrust actions.Net earnings for 2006 included after-tax income of
$3.9 million from discontinued operations, which resulted
from the reversal of an accrual for an income tax-related
contingency originally recorded in connection with the June 2004
transfer of the Companys former cigar operations to a
smokeless tobacco competitor. This reversal resulted from a
change in facts and circumstances, as the income tax
consequences of the Companys anticipated sale of its
corporate headquarters in connection with Project Momentum have
eliminated the need for the aforementioned contingency.

Basic and diluted earnings per share for 2006 were $3.15 and
$3.12, respectively, a decrease of 3.4 percent for each
measure as compared to the corresponding comparative measures in
2005. Average basic shares outstanding were lower in 2006 than
in 2005 primarily as a result of share repurchases, partially
offset by the exercise of stock options. Average diluted shares
outstanding in 2006 were lower than those in 2005 due to the
impact of share repurchases and a lower level of dilutive
outstanding options, partially offset by the impact of a higher
average stock price in 2006, as compared to 2005, which has the
effect of increasing diluted shares outstanding.

Net Sales

|                       |                      |              |           |            |  |        |           |           |  |   |      |         |   |  |      |      |  
|---------------------- | -------------------- | ------------ | --------- | ---------- |  | ------ | --------- | --------- |  | - | ---- | ------- | - |  | ---- | ---- | -
|                       |                      | Year Ended   |           | Increase/ 
|                       |                      | December 31, |           | (Decrease)
|                       |                      |              |           |           
|                       |                      | 2006         |           | 2005       |  | Amount |           | %        
|                       |                      |              |           |           
|Net Sales by Segment:  |                      |              |           |            |  |        |           |           |  |   |      |         |   |  |      |     
|                      
|                      
|                      
|                      
|                       | Smokeless Tobacco    |              | $         | 1,522,686  |  |        | $         | 1,561,667 |  |   | $    | (38,981 | ) |  |      | (2.5 | )
|                      
|                      
|                      
|                      
|                       | Wine                 |              |           | 282,403    |  |        |           | 248,342   |  |   |      | 34,061  |   |  |      | 13.7 |  
|                      
|                      
|                      
|                      
|                       | All Other Operations |              |           | 45,822     |  |        |           | 41,876    |  |   |      | 3,946   |   |  |      | 9.4  |  
|                       |                      |              |           |            |  |        |           |           |  |   |      |         |   |  |      |     
|Consolidated Net Sales |                      | $            | 1,850,911 |            |  | $      | 1,851,885 |           |  | $ | (974 | )       |   |  | (0.1 | )   
|                       |                      |              |           |            |  |        |           |           |  |   |      |         |   |  |      |     



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lower net revenue realization per premium unit in the Smokeless
    Tobacco segment in connection with the implementation of the
    Companys premium brand loyalty initiatives;
| |  | Increased net unit volume for moist smokeless tobacco products,
    including a slight increase in premium net unit volume;                                                      
| |  | Improved case volume for premium wine; and,                                                                                                                                      
| |  | Increased international sales of moist smokeless tobacco
    products.                                                                                                           






21







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##### Table of Contents

Managements Discussion and Analysis(Continued)

Segment Net Sales as a Percentage of Consolidated Net
Sales

|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2006(PIE CHART) |  | 2005(PIE CHART)



|  |                  
|- | -----------------
|* | Smokeless Tobacco

Gross Margin


|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|---------------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                             |  | Year Ended   |           | Increase/ 
|                             |  | December 31, |           | (Decrease)
|                             |  |              |           |           
|                             |  | 2006         |           | 2005       |  | Amount |           | %
|                             |  |              |           |           
|Gross Margin by
    Segment: |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|                            
|                            
|                            
|                            
|Smokeless Tobacco            |  | $            | 1,256,156 |            |  | $      | 1,289,212 |   |  | $ | (33,056 | ) |  |  | (2.6 | )
|                            
|                            
|                            
|                            
|Wine                         |  |              | 99,418    |            |  |        | 92,618    |   |  |   | 6,800   |   |  |  | 7.3  |  
|                            
|                            
|                            
|                            
|All Other Operations         |  |              | 29,249    |            |  |        | 26,924    |   |  |   | 2,325   |   |  |  | 8.6  |  
|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|Consolidated Gross Margin    |  | $            | 1,384,823 |            |  | $      | 1,408,754 |   |  | $ | (23,931 | ) |  |  | (1.7 | )
|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  



|                                                 |  |              |       |           |  |            |       |  |  |  |      |  
|------------------------------------------------ |  | ------------ | ----- | --------- |  | ---------- | ----- |  |  |  | ---- | -
|                                                 |  | Year Ended   |       |          
|                                                 |  | December 31, |       |          
|                                                 |  |              |       | Increase/
|                                                 |  | 2006         |       | 2005      |  | (Decrease)
|                                                 |  |             
|                                                
|                                                
|                                                
|                                                
|Gross Margin as a % of Net Sales
    by Segment: |  |              |       |           |  |            |       |  |  |  |      |  
|                                                
|                                                
|                                                
|                                                
|Smokeless Tobacco                                |  |              | 82.5% |           |  |            | 82.6% |  |  |  | (0.1 | )
|                                                
|                                                
|                                                
|                                                
|Wine                                             |  |              | 35.2% |           |  |            | 37.3% |  |  |  | (2.1 | )
|                                                
|                                                
|                                                
|                                                
|All Other Operations                             |  |              | 63.8% |           |  |            | 64.3% |  |  |  | (0.5 | )
|                                                
|                                                
|                                                
|                                                
|Consolidated                                     |  |              | 74.8% |           |  |            | 76.1% |  |  |  | (1.3 | )



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | Higher case volume for wine, which sells at lower margins than
    moist smokeless tobacco products; and
| |  | Lower net revenue realization per premium unit in the Smokeless
    Tobacco segment.                    



| |   |                                                   
| | - | --------------------------------------------------
| |  | Lower unit costs in the Smokeless Tobacco segment.

Restructuring Charges






22







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##### Table of Contents

10K


charges incurred to date, as well as the total amount of charges
expected to be incurred, related to the aforementioned
$100 million in savings, in connection with Project
Momentum for each major type of cost associated with the
initiative:

|                              |  |                   |        |                |  |   |                  | 
|----------------------------- |  | ----------------- | ------ | -------------- |  | - | ---------------- | 
|                              |  | Restructuring     |        |               
|                              |  | Charges Incurred  |        | Total Charges 
|                              |  | Year Ended        |        | Expected to be
|                              |  | December 31, 2006 |        | Incurred(1)   
|                              |  |                  
|One-time termination benefits |  | $                 | 15,625 |                |  | $ | 16,000 - $17,000 | 
|                             
|                             
|                             
|                             
|Contract termination costs    |  |                   | 390    |                |  |   | 400 - 500        | 
|                             
|                             
|                             
|                             
|Other restructuring costs     |  |                   | 5,982  |                |  |   | 11,000 - 12,000  | 
|                              |  |                   |        |                |  |   |                  | 
|Total                         |  | $                 | 21,997 |                |  | $ | 27,400 - $29,500 | 
|                              |  |                   |        |                |  |   |                  | 



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The total cost of one-time termination benefits expected to be
    incurred under Project Momentum reflects the initiatives
    overall anticipated elimination of approximately 10 percent
    of the Companys salaried, full-time non-union positions
    across various functions and operations, primarily at the
    Companys corporate headquarters. The majority of the total
    one-time termination benefit costs expected to be incurred were
    recognized in 2006, with the remainder to be recognized in 2007.
    The majority of total contract termination costs expected to be
    incurred were recognized in 2006, with the remainder anticipated
    to be recognized in 2007. Approximately half of the total other
    restructuring charges expected to be incurred were recognized in
    2006, with the remainder expected to be recognized in 2007. The
    estimate of total restructuring charges expected to be incurred
    reflects an increase of $5 million from the estimate
    previously provided in the Companys
    Form 10-Q for the
    quarterly period ended September 30, 2006. The increase
    relates to higher anticipated charges for professional fees
    directly related to the implementation of Project Momentum.
    While the Company believes that its estimates of total
    restructuring charges expected to be incurred are appropriate
    and reasonable based upon the information available, actual
    results could differ from such estimates. Total restructuring
    charges expected to be incurred currently represent the
    Companys best estimates of the ranges of such charges;
    although there may be additional charges recognized as
    additional actions are identified and finalized.



2005 compared with 2004


|                           |  |              |           |            |  |        |           |   |  |   |        |  |  |  |     | 
|-------------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------ |  |  |  | --- | 
|                           |  | Year Ended   |           | Increase/ 
|                           |  | December 31, |           | (Decrease)
|                           |  |              |           |           
|                           |  | 2005         |           | 2004       |  | Amount |           | %
|                           |  |              |           |           
|                          
|                          
|                          
|                          
|Net sales                  |  | $            | 1,851,885 |            |  | $      | 1,838,238 |   |  | $ | 13,647 |  |  |  | 0.7 | 
|                          
|                          
|                          
|                          
|Net earnings               |  |              | 534,268   |            |  |        | 530,837   |   |  |   | 3,431  |  |  |  | 0.6 | 
|                          
|                          
|                          
|                          
|Basic earnings per share   |  |              | 3.26      |            |  |        | 3.21      |   |  |   | 0.05   |  |  |  | 1.6 | 
|                          
|                          
|                          
|                          
|Diluted earnings per share |  |              | 3.23      |            |  |        | 3.19      |   |  |   | 0.04   |  |  |  | 1.3 | 

Net Earnings






23







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##### Table of Contents

Managements Discussion and Analysis(Continued)

the transfer of the Companys cigar operations to a
smokeless tobacco competitor, partially offset by lower
operating income. The Company reported operating income of
$878.2 million for 2005, representing 47.4 percent of
consolidated net sales, compared to operating income of
$912.6 million, or 49.6 percent of consolidated net
sales, in 2004. The decrease in operating income was primarily
due to the following:


    Higher costs of products sold;
    Higher SA&A expenses; and,
    The impact of an $11.8 million net pre-tax charge recorded
    in connection with the settlement of certain states
    indirect purchaser antitrust actions that were for amounts in
    excess of those previously reserved.Partially offset by:


    Increased net sales, as detailed below.Net earnings for 2005 benefited from the absence of an after-tax
loss of $7.2 million from discontinued operations
recognized in 2004, related to the results of the Companys
former cigar operation, which was transferred to a smokeless
tobacco competitor in June 2004, in connection with the
agreement to resolve an antitrust action. The 2004 results from
discontinued operations include a loss from the cigar operation
and the recognition of expenses, including a $3.9 million
accrual for an income tax contingency.

Basic and diluted earnings per share for 2005 increased
1.6 percent and 1.3 percent, respectively, from 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 dilutive
options outstanding in 2005.

Net Sales

|                       |                      |              |           |            |  |        |           |           |  |   |        |         |   |  |     |      |  
|---------------------- | -------------------- | ------------ | --------- | ---------- |  | ------ | --------- | --------- |  | - | ------ | ------- | - |  | --- | ---- | -
|                       |                      | Year Ended   |           | Increase/ 
|                       |                      | December 31, |           | (Decrease)
|                       |                      |              |           |           
|                       |                      | 2005         |           | 2004       |  | Amount |           | %        
|                       |                      |              |           |           
|Net Sales by Segment:  |                      |              |           |            |  |        |           |           |  |   |        |         |   |  |     |     
|                      
|                      
|                      
|                      
|                       | Smokeless Tobacco    |              | $         | 1,561,667  |  |        | $         | 1,575,254 |  |   | $      | (13,587 | ) |  |     | (0.9 | )
|                      
|                      
|                      
|                      
|                       | Wine                 |              |           | 248,342    |  |        |           | 226,650   |  |   |        | 21,692  |   |  |     | 9.6  |  
|                      
|                      
|                      
|                      
|                       | All Other Operations |              |           | 41,876     |  |        |           | 36,334    |  |   |        | 5,542   |   |  |     | 15.3 |  
|                       |                      |              |           |            |  |        |           |           |  |   |        |         |   |  |     |     
|Consolidated Net Sales |                      | $            | 1,851,885 |            |  | $      | 1,838,238 |           |  | $ | 13,647 |         |   |  | 0.7 |     
|                       |                      |              |           |            |  |        |           |           |  |   |        |         |   |  |     |     



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Higher selling prices for moist smokeless tobacco products;           
| |  | Improved case volume for premium wine; and,                           
| |  | Increased international sales of moist smokeless tobacco
    products.



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Lower net unit volume for moist smokeless tobacco products; and,                     
| |  | An unfavorable shift in overall product mix for moist smokeless
    tobacco products.






24







---



##### Table of Contents

10K


Segment Net Sales as a Percentage of Consolidated Net
Sales

|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2005(PIE CHART) |  | 2004(PIE CHART)

Gross Margin


|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|---------------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                             |  | Year Ended   |           | Increase/ 
|                             |  | December 31, |           | (Decrease)
|                             |  |              |           |           
|                             |  | 2005         |           | 2004       |  | Amount |           | %
|                             |  |              |           |           
|Gross Margin by
    Segment: |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|                            
|                            
|                            
|                            
|Smokeless Tobacco            |  | $            | 1,289,212 |            |  | $      | 1,317,365 |   |  | $ | (28,153 | ) |  |  | (2.1 | )
|                            
|                            
|                            
|                            
|Wine                         |  |              | 92,618    |            |  |        | 85,913    |   |  |   | 6,705   |   |  |  | 7.8  |  
|                            
|                            
|                            
|                            
|All Other Operations         |  |              | 26,924    |            |  |        | 22,319    |   |  |   | 4,605   |   |  |  | 20.6 |  
|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|Consolidated Gross Margin    |  | $            | 1,408,754 |            |  | $      | 1,425,597 |   |  | $ | (16,843 | ) |  |  | (1.2 | )
|                             |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  



|                                                 |  |              |       |           |  |           |       |  |  |  |      |  
|------------------------------------------------ |  | ------------ | ----- | --------- |  | --------- | ----- |  |  |  | ---- | -
|                                                 |  | Year Ended   |       |          
|                                                 |  | December 31, |       |          
|                                                 |  |              |       |          
|                                                 |  | 2005         |       | 2004      |  | Increase/
|                                                 |  |              |       | (Decease)
|                                                 |  |              |       |          
|                                                
|                                                
|                                                
|                                                
|Gross Margin as a % of Net Sales
    by Segment: |  |              |       |           |  |           |       |  |  |  |      |  
|                                                
|                                                
|                                                
|                                                
|Smokeless Tobacco                                |  |              | 82.6% |           |  |           | 83.6% |  |  |  | (1.0 | )
|                                                
|                                                
|                                                
|                                                
|Wine                                             |  |              | 37.3% |           |  |           | 37.9% |  |  |  | (0.6 | )
|                                                
|                                                
|                                                
|                                                
|All Other Operations                             |  |              | 64.3% |           |  |           | 61.4% |  |  |  | 2.9  |  
|                                                
|                                                
|                                                
|                                                
|Consolidated                                     |  |              | 76.1% |           |  |           | 77.6% |  |  |  | (1.5 | )



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Higher unit costs and the negative shift in overall product mix
    for moist smokeless tobacco; and,
| |  | Higher case volume for wine, which sells at lower margins than
    moist smokeless tobacco products. 



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Higher selling prices for moist smokeless tobacco products.

SMOKELESS TOBACCO SEGMENT


2006 compared with 2005


|                      |  |              |           |            |  |        |           |   |  |   |         |   |  |  |       |  
|--------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ----- | -
|                      |  | Year Ended   |           | Increase/ 
|                      |  | December 31, |           | (Decrease)
|                      |  |              |           |           
|                      |  | 2006         |           | 2005       |  | Amount |           | %
|                      |  |              |           |           
|Net sales             |  | $            | 1,522,686 |            |  | $      | 1,561,667 |   |  | $ | (38,981 | ) |  |  | (2.5  | )
|                     
|                     
|                     
|                     
|Restructuring charges |  |              | 19,542    |            |  |        |          |   |  |   | 19,542  |   |  |  |      |  
|                     
|                     
|                     
|                     
|Antitrust litigation  |  |              | 2,025     |            |  |        | 11,762    |   |  |   | (9,737  | ) |  |  | (82.8 | )
|                     
|                     
|                     
|                     
|Operating profit      |  |              | 805,130   |            |  |        | 852,478   |   |  |   | (47,348 | ) |  |  | (5.6  | )



25







---



##### Table of Contents

Managements Discussion and Analysis(Continued)

Net Sales

Net sales for the Smokeless Tobacco segment decreased in 2006,
as compared to 2005, primarily due to the effects of the
Companys premium brand loyalty initiative, which began in
the first quarter of 2006. The Company believes that costs
incurred in connection with this initiative, inclusive of
adjustments from its originally announced spending under the
initiative, such as increased spending, reallocations of
spending and changes in price-based incentives, have been
effectively utilized to increase the focus in states that were
experiencing premium volume deterioration at, and subsequent to,
the plans inception. Overall, the costs incurred under
this initiative produced the desired effect of stabilizing
premium net unit volume, which increased slightly by
0.1 percent in 2006, as compared to the prior year. The
segments net sales declined despite an increase in
premium, as well as overall, net unit volume for moist smokeless
tobacco products, as a result of lower net revenue realization
per premium unit, reflecting the aforementioned impact of the
premium brand loyalty initiative, due to the following:


    An unfavorable shift in product mix, with lower net unit volume
    for straight stock premium products more than offset by an
    increase in net unit volume for value pack premium products; and,
    Increased sales incentive costs, primarily retail buydowns.Partially offset by:


    Higher wholesale list selling prices.Also contributing to the decline in net sales, despite higher
overall net unit volume for moist smokeless tobacco products,
was a shift in product mix from premium to price-value products.
This shift reflected an increase in net sales of price-value
products, which accounted for 8.1 percent of total
Smokeless Tobacco segment net sales in 2006, as compared to
7.4 percent in 2005.

Percentage of Smokeless Tobacco Segment Net Sales by
Product Category

|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2006(PIE CHART) |  | 2005(PIE CHART)



|   |                                     
|-- | ------------------------------------
|*  | Moist smokeless tobacco products    
|** | Includes dry snuff and tobacco seeds








26







---



##### Table of Contents

10K


MSTP Net Unit Volume

|                                        |  |              |       |            |  |        |       |   |  |  |     |  |  |  |     | 
|--------------------------------------- |  | ------------ | ----- | ---------- |  | ------ | ----- | - |  |  | --- |  |  |  | --- | 
|                                        |  | Year Ended   |       | Increase/ 
|                                        |  | December 31, |       | (Decrease)
|                                        |  |              |       |           
|                                        |  | 2006         |       | 2005       |  | Amount |       | %
|                                        |  |              |       |           
|Net Unit Volume (millions of
    cans): |  |              |       |            |  |        |       |   |  |  |     |  |  |  |     | 
|                                       
|                                       
|                                       
|                                       
|Premium                                 |  |              | 541.4 |            |  |        | 541.0 |   |  |  | 0.4 |  |  |  | 0.1 | 
|                                       
|                                       
|                                       
|                                       
|Price-Value                             |  |              | 91.3  |            |  |        | 84.4  |   |  |  | 6.9 |  |  |  | 8.2 | 
|                                        |  |              |       |            |  |        |       |   |  |  |     |  |  |  |     | 
|Total                                   |  |              | 632.7 |            |  |        | 625.4 |   |  |  | 7.3 |  |  |  | 1.2 | 
|                                        |  |              |       |            |  |        |       |   |  |  |     |  |  |  |     | 

Percentage of Total Moist Smokeless Tobacco Products Net
Unit Volume by Category Segment


|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2006(PIE CHART) |  | 2005(PIE CHART)





Premium Net Unit Volume % Change from Prior Year Period







|  |                                   
|- | ----------------------------------
|* | Adjusted for 3.7 million can shift



27







---



##### Table of Contents

Managements Discussion and Analysis(Continued)

The Company is encouraged by this continued trend improvement in
net unit volume for premium products, with a return to quarterly
year-over-year net unit volume growth beginning in the third
quarter of 2006, resulting in full year net unit volume growth
for premium products. The Company believes this improvement in
premium net unit volume performance is attributable to the
following factors:




    Implementation of the Companys premium brand loyalty
    initiative, which was adjusted throughout the year as deemed
    necessary, and has narrowed the price gaps between premium and
    price-value products on a state-by-state basis, varying in
    degree;
    Continued spending on category growth initiatives; and,
    The impact of lower gasoline prices on consumers
    disposable income, particularly during the fourth quarter of
    2006, as compared to the prior year.Net unit volume for price-value products includes Red Seal, the
Companys traditional price-value product, and Husky, the
Companys sub-price-value product. Full year 2006 net
unit volume for Red Seal decreased slightly, as compared to the
prior year, although fourth quarter 2006 net unit volume
stabilized as compared to the prior year, reflecting the impact
of increased sales incentives. Net unit volume for Husky
increased for both the full year and fourth quarter of 2006, as
compared to the corresponding prior year periods.

The Company remains committed to the development of new products
and packaging that cover both core product launches and other
possible innovations. Net can sales for 2006 included
approximately 74.3 million cans of new products launched
within the last three years, representing 11.7 percent of
the Companys total moist smokeless tobacco net unit volume
for the period. These new products included:




    Three varieties of Skoal Long Cut
    Three varieties of Skoal Pouches
    Skoal Bandits (new and improved)*
    Copenhagen Long Cut Straight*
    Two varieties of Red Seal Long Cut
    Two varieties of Husky Fine Cut
    Various varieties of Husky Long Cut

*
    Product introduced during 2006.In connection with the Companys objective to grow the
moist smokeless tobacco category by building awareness and
social acceptability of smokeless tobacco products among adult
consumers, primarily smokers, the Companys premium pouch
products have demonstrated continued growth. Net unit volume for
the aforementioned Skoal Pouches, combined with Copenhagen
Pouches, increased 28 percent in 2006, compared to 2005,
and increased 32.4 percent in the fourth quarter of 2006,
as compared to the corresponding prior year period. In order to
build upon this pouch strategy, the Company introduced new and
improved Skoal Bandits moist smokeless tobacco pouches in the
third quarter of 2006. New and improved Skoal Bandits provide a
compact pouch, which is designed to be more comfortable in the
mouth than original Skoal Bandits and easier to use by adult
consumers. The combined portion pack business, which includes
Copenhagen and Skoal Pouches, as well as Skoal Bandits,
increased 20.6 percent and 20.7 percent in 2006 and
the fourth quarter, respectively, as compared to the
corresponding prior year periods. In 2006, portion packs
represented 8.5 percent of the Companys premium net
unit volume.

The Company began test marketing a new product, Skoal Dry, in
two markets in July 2006. In keeping with the objective to
improve smokeless tobaccos social acceptability, this
product, also aimed at converting adult smokers, is designed to
be spit-free.

The following provides information from the Companys
Retail Account Data Share & Volume Tracking System
(RAD-SVT), as provided by Management Science Associates, Inc.,
which measures shipments from wholesale to retail. This
information, for the
26-week period ending
December 23, 2006, reflects a significant trend
improvement, as compared to the RAD-SVT data presented in the
2005 compared with 2004 section



28



---



##### Table of Contents

10K


contained herein. The Company believes that this improvement
reflects the impact of the full implementation of its premium
brand loyalty initiative during 2006.

|                     |                                |                   |  |      |       |  |                     |  |      |    |  |  |      |  
|-------------------- | ------------------------------ | ----------------- |  | ---- | ----- |  | ------------------- |  | ---- | -- |  |  | ---- | -
|                     |                                |                   |  |      |       |  | Percentage Point   
|                     |                                | Can-Volume %      |  |      |       |  | Increase/(Decrease)
|                     |                                | Change from Prior |  |      | %     |  | from Prior Year    
|                     |                                | Year Period       |  |      | Share |  | Period             
|                     |                                |                   |  |      |      
|Total Category Data: |                                |                   |  |      |       |  |                     |  |      |    |  |  |     
|                    
|                    
|                    
|                    
|                     | Total Moist Smokeless Category |                   |  | 8.1  | %     |  |                     |  | N/A  |    |  |  | N/A  |  
|                    
|                    
|                    
|                    
|                     | Total Premium Segment          |                   |  | 1.7  | %     |  |                     |  | 56.9 | %* |  |  | (3.6 | )
|                    
|                    
|                    
|                    
|                     | Total Value Segments           |                   |  | 17.9 | %     |  |                     |  | 43.0 | %* |  |  | 3.6  |  
|                    
|                    
|                    
|                    
|Company Data:        |                                |                   |  |      |       |  |                     |  |      |    |  |  |     
|                    
|                    
|                    
|                    
|                     | Total Moist Smokeless Category |                   |  | 3.1  | %     |  |                     |  | 61.2 | %  |  |  | (3.0 | )
|                    
|                    
|                    
|                    
|                     | Total Premium Segment          |                   |  | 2.3  | %     |  |                     |  | 90.5 | %  |  |  | 0.5  |  
|                    
|                    
|                    
|                    
|                     | Total Value Segments           |                   |  | 7.5  | %     |  |                     |  | 22.6 | %  |  |  | (2.2 | )



|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
|* | Amounts reported do not add to 100 percent, as this table
    does not reflect the herbal segment of the total moist smokeless
    category.

26-week


10-K,


10-Q


26-week






29







---



##### Table of Contents

Managements Discussion and Analysis(Continued)

order to improve the overall accuracy of the information for
comparative and analytical purposes, by incorporating
refinements to the extrapolation methodology used to project
data from a statistically representative sample. Adjustments are
typically made for static store counts and new reporting
customers.

The Company is currently in the process of reviewing preliminary
2006 and 2005 RAD-SVT adjustments provided by Management Science
Associates, Inc. While these adjustments are not expected to be
material to the Companys outlook, some revisions to
previously reported RAD-SVT results are expected and will be
provided when the Company reports its first quarter 2007 results.

Cost of Products Sold

Cost of products sold decreased 2.2 percent in 2006,
compared to 2005, as the impact of lower unit costs was
partially offset by overall increased net unit volume for moist
smokeless tobacco products. In addition, the cost of products
sold comparison was favorably impacted by impairment charges,
recorded in 2005, related to certain manufacturing equipment,
lower charges recorded in connection with the tobacco quota
buyout legislation, and lower charges for inventory
obsolescence. The decreased moist smokeless tobacco unit costs
were primarily due to lower leaf tobacco and other costs,
partially offset by higher labor and overhead.

Gross Margin

|                                 |  |              |           |            |  |        |           |   |  |   |         |   |  |  |      |  
|-------------------------------- |  | ------------ | --------- | ---------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                                 |  | Year Ended   |           | Increase/ 
|                                 |  | December 31, |           | (Decrease)
|                                 |  |              |           |           
|                                 |  | 2006         |           | 2005       |  | Amount |           | %
|                                 |  |              |           |           
|                                
|                                
|                                
|                                
|Gross Margin                     |  | $            | 1,256,156 |            |  | $      | 1,289,212 |   |  | $ | (33,056 | ) |  |  | (2.6 | )
|                                
|                                
|                                
|                                
|Gross Margin as a % of Net Sales |  |              | 82.5      | %          |  |        | 82.6      | % |  |   |         |   |  |  |      |  



SA&A Expenses




| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher expenses related to direct marketing, print advertising
    and one-on-one
    marketing efforts, the majority of which related to the
    Companys category growth and premium brand loyalty
    initiatives;
| |  | Increased spending on market research to support premium brand
    loyalty initiatives and product innovation;                                                                                                        
| |  | Higher legal and government relations expenses, as well as
    increased other professional fees;                                                                                                                     
| |  | Higher share-based compensation expense;                                                                                                                                                                              
| |  | Costs incurred in connection with efforts to defeat ballot
    initiatives, primarily a November 2006 ballot initiative in
    California;                                                                            
| |  | Absence of the recovery of amounts due in connection with a
    bankrupt smokeless tobacco customer, which had a favorable
    impact in 2005; and,                                                                   
| |  | Absence of the gain recognized in 2005 from the sale of the
    Companys corporate aircraft.                                                                                                                         



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lower salaries and related costs associated with certain
    positions eliminated in the restructuring under Project Momentum;                                                                                                    
| |  | Lower costs associated with retail shelving systems used to
    promote the moist smokeless tobacco categorys products, as
    the prior year included charges related to a physical inventory
    of previously installed units;
| |  | Funds received with respect to litigation relating to the proper
    other tobacco products excise tax base;                                                                                                                      
| |  | Lower costs related to trade promotional materials and
    point-of-sale
    advertising;                                                                                                                                         



30







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##### Table of Contents

10K



    The absence of $3.3 million in impairment charges recorded
    in 2005 for goodwill and intangible assets at F.W. Rickard
    Seeds, Inc.; and,
    The absence of certain tobacco settlement-related charges
    recognized in 2005.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, 2006 and 2005, outside legal fees and other
internal and external costs incurred in connection with
administering and litigating product liability claims were
$14.3 million and $13.9 million, respectively. These
costs reflect a number of factors, including the number of
claims, and the legal and regulatory environments affecting the
Companys products. The Company expects these factors to be
the primary influence on its future costs of administering and
litigating product liability claims. The Company does not expect
these costs to increase significantly in the future; however, it
is possible that adverse changes in the aforementioned factors
could have a material adverse effect on such costs, as well as
on results of operations and cash flows in the periods such
costs are incurred.

Antitrust Litigation

Results for the Smokeless Tobacco Segment in 2006 were favorably
impacted by the absence of $11.8 million in charges related
to the 2005 resolution of certain states indirect
purchaser antitrust actions that were for amounts in excess of
those previously recorded. This favorable variance was partially
offset by a $2 million pre-tax charge recognized in 2006,
reflecting a change in the estimated redemption rate and an
administrative fee adjustment for coupons in connection with the
resolution of certain states indirect purchaser antitrust
actions (see Part II, Item 8, Notes to
Consolidated Financial Statements  Note 21,
Contingencies, for additional details).

Restructuring Charges

Smokeless Tobacco segment results for 2006 reflect
$19.5 million of the restructuring charges discussed in the
Consolidated Results section above.

2005 compared with 2004

|                     |  |                         |           |                     |  |        |           |   |  |   |         |   |  |  |      |  
|-------------------- |  | ----------------------- | --------- | ------------------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                     |  | Year Ended December 31, |           | Increase/(Decrease)
|                     |  |                         |           |                    
|                     |  | 2005                    |           | 2004                |  | Amount |           | %
|                     |  |                         |           |                     |  |       
|                     |  |                         |           |                    
|Net sales            |  | $                       | 1,561,667 |                     |  | $      | 1,575,254 |   |  | $ | (13,587 | ) |  |  | (0.9 | )
|                    
|                    
|                    
|                    
|Antitrust litigation |  |                         | 11,762    |                     |  |        | (582      | ) |  |   | 12,344  |   |  |  |     |  
|                    
|                    
|                    
|                    
|Operating profit     |  |                         | 852,478   |                     |  |        | 897,991   |   |  |   | (45,513 | ) |  |  | (5.1 | )

Net Sales




| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreases in traditional trade discounting initiatives,
    primarily retail buydowns; and,                                                                                   
| |  | Lower costs associated with the Companys former
    performance-based customer incentive plan, the STEPS Rewards
    program, resulting from the decrease in net unit volume.



| |   |                                    
| | - | -----------------------------------
| |  | Higher expenses related to coupons.





31







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##### Table of Contents

Managements Discussion and Analysis(Continued)

MSTP Unit Volume

|                                        |  |              |       |                     |  |        |       |   |  |  |       |   |  |  |      |  
|--------------------------------------- |  | ------------ | ----- | ------------------- |  | ------ | ----- | - |  |  | ----- | - |  |  | ---- | -
|                                        |  | Year Ended   |       |                    
|                                        |  | December 31, |       | Increase/(Decrease)
|                                        |  |              |       |                    
|                                        |  | 2005         |       | 2004                |  | Amount |       | %
|                                        |  |              |       |                    
|Net Unit Volume (millions of
    cans): |  |              |       |                     |  |        |       |   |  |  |       |   |  |  |      |  
|                                       
|                                       
|                                       
|                                       
|Premium                                 |  |              | 541.0 |                     |  |        | 570.2 |   |  |  | (29.2 | ) |  |  | (5.1 | )
|                                       
|                                       
|                                       
|                                       
|Price-Value                             |  |              | 84.4  |                     |  |        | 71.2  |   |  |  | 13.2  |   |  |  | 18.5 |  
|                                        |  |              |       |                     |  |        |       |   |  |  |       |   |  |  |      |  
|Total                                   |  |              | 625.4 |                     |  |        | 641.4 |   |  |  | (16.0 | ) |  |  | (2.5 | )
|                                        |  |              |       |                     |  |        |       |   |  |  |       |   |  |  |      |  

Percentage of Total Moist Smokeless Tobacco Products Net
Unit Volume by Category Segment


|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2005(PIE CHART) |  | 2004(PIE CHART)



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Unfavorable impact of widening price gaps at retail between
    premium and price-value products;                                                                                                                                      
| |  | The negative impact of higher gasoline prices in 2005, compared
    to 2004, on adult consumers disposable income, which
    served to magnify the effects of the price gap at retail;                                                
| |  | Wholesale and retail customers increasing inventories in the
    fourth quarter of 2004 in advance of the January 1, 2005
    price increase for premium products, with an estimated impact of
    approximately 3.7 million cans; and,
| |  | A decline in premium pre-pack promotional net unit volume.                                                                                                                                                                             



| |   |                                                
| | - | -----------------------------------------------
| |  | An increase in net unit volume for value packs.



26-week


|                     |                                |                        |  |      |       |  |                        |  |      |    |  |  |      |  
|-------------------- | ------------------------------ | ---------------------- |  | ---- | ----- |  | ---------------------- |  | ---- | -- |  |  | ---- | -
|                     |                                |                        |  |      |       |  | Percentage Point      
|                     |                                | Can-Volume % Change    |  |      | %     |  | Increase/(Decrease)   
|                     |                                | from Prior Year Period |  |      | Share |  | from Prior Year Period
|                     |                                |                        |  |      |      
|                    
|                    
|                    
|                    
|Total Category Data: |                                |                        |  |      |       |  |                        |  |      |    |  |  |     
|                    
|                    
|                    
|                    
|                     | Total Moist Smokeless Category |                        |  | 4.4  | %     |  |                        |  | N/A  |    |  |  | N/A  |  
|                    
|                    
|                    
|                    
|                     | Total Premium Segment          |                        |  | (6.2 | )%    |  |                        |  | 60.4 | %* |  |  | (6.9 | )
|                    
|                    
|                    
|                    
|                     | Total Value Segments           |                        |  | 26.6 | %     |  |                        |  | 39.4 | %* |  |  | 6.9  |  
|                    
|                    
|                    
|                    
|Company Data:        |                                |                        |  |      |       |  |                        |  |      |    |  |  |     
|                    
|                    
|                    
|                    
|                     | Total Moist Smokeless Category |                        |  | (2.4 | )%    |  |                        |  | 64.2 | %  |  |  | (4.5 | )
|                    
|                    
|                    
|                    
|                     | Total Premium Segment          |                        |  | (5.7 | )%    |  |                        |  | 90.0 | %  |  |  | 0.4  |  
|                    
|                    
|                    
|                    
|                     | Total Value Segments           |                        |  | 21.9 | %     |  |                        |  | 24.8 | %  |  |  | (0.9 | )



|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
|* | Amounts reported do not add to 100 percent, as this table
    does not reflect the herbal segment of the total moist smokeless
    category.



32







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##### Table of Contents

10K


When applying retail pricing data from ACNielsen to the
26-week periods
RAD-SVT shipment data, the moist smokeless tobacco category
revenues grew 3.5 percent in 2005 over the comparable 2004
period. The Companys revenue share over that same period
was 76.1 percent, down 1.9 percentage points from the
corresponding 2004 period.

Cost of Products Sold

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 F.W. Rickard Seeds, Inc. 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 Margin

|                                 |  |                         |           |                     |  |        |           |   |  |   |         |   |  |  |      |  
|-------------------------------- |  | ----------------------- | --------- | ------------------- |  | ------ | --------- | - |  | - | ------- | - |  |  | ---- | -
|                                 |  | Year Ended December 31, |           | Increase/(Decrease)
|                                 |  |                         |           |                    
|                                 |  | 2005                    |           | 2004                |  | Amount |           | %
|                                 |  |                         |           |                    
|                                
|                                
|                                
|                                
|Gross Margin                     |  | $                       | 1,289,212 |                     |  | $      | 1,317,365 |   |  | $ | (28,153 | ) |  |  | (2.1 | )
|                                
|                                
|                                
|                                
|Gross Margin as a % of Net Sales |  |                         | 82.6      | %                   |  |        | 83.6      | % |  |   |         |   |  |  |      |  



SA&A Expenses




| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher costs related to retail shelving systems, which included
    charges resulting from a physical inventory of previously
    installed units;
| |  | Higher salaries and related costs incurred in support of the
    Companys moist smokeless tobacco category growth
    initiatives;               
| |  | Increased administrative and other expenses, including higher
    legal-related spending and compensation costs; and,                             
| |  | A $3.3 million impairment charge recorded for goodwill and
    intangible assets at F.W. Rickard Seeds, Inc.                                      



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | Lower costs for print advertising, sponsorships, and trade
    promotional materials;    
| |  | A 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.



Antitrust Litigation






33







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##### Table of Contents

Managements Discussion and Analysis(Continued)

WINE SEGMENT

2006 compared with 2005

|                      |  |              |         |                     |  |        |         |   |  |   |        |  |  |  |      | 
|--------------------- |  | ------------ | ------- | ------------------- |  | ------ | ------- | - |  | - | ------ |  |  |  | ---- | 
|                      |  | Year Ended   |         |                    
|                      |  | December 31, |         | Increase/(Decrease)
|                      |  |              |         |                    
|                      |  | 2006         |         | 2005                |  | Amount |         | %
|                      |  |              |         |                     |  |       
|                      |  |              |         |                    
|Net sales             |  | $            | 282,403 |                     |  | $      | 248,342 |   |  | $ | 34,061 |  |  |  | 13.7 | 
|                     
|                     
|                     
|                     
|Restructuring charges |  |              | 322     |                     |  |        |        |   |  |   | 322    |  |  |  |     | 
|                     
|                     
|                     
|                     
|Operating profit      |  |              | 44,080  |                     |  |        | 37,764  |   |  |   | 6,316  |  |  |  | 16.7 | 

Net Sales




| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Favorable third party acclaim and product ratings, reflecting
    some of the highest scores ever received by the Company,
    including 50 wines scoring ratings of 90 or higher and two wines
    on the Wine Spectator Top 100 Wines of 2006;                           
| |  | The broadening of the distribution of the Companys wines
    as a direct result of the Companys continued efforts to
    increase distribution through the expansion of its sales force;                                                                                 
| |  | The addition of the Antinori and Erath brands in 2006, which the
    Company began selling in the third quarter of 2006; and,                                                                                                                                              
| |  | New product introductions, which included expansion of Chateau
    Ste. Michelles Indian Wells product category, the addition
    of Orphelin, which is a blended red wine from Chateau Ste.
    Michelle, and the introduction of Columbia Crest 1.5 liter
    varietals.

Case Volume


Percentage of Total Case Volume by Brand


|                |  |                
|--------------- |  | ---------------
|               
|               
|               
|               
|2006(PIE CHART) |  | 2005(PIE CHART)





34







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##### Table of Contents

10K


for 2006 was also favorably impacted by the addition of the
Antinori and Erath brands, which the Company began selling in
the third quarter of 2006, with volume from these brands
accounting for approximately 3.8 percentage points of the
overall 11.4 percent case volume increase. Case volume for
Domaine Ste. Michelle, as well as 14 Hands and Red Diamond, two
of the Companys newer labels, also contributed to the
increase in case volume for 2006.

Cost of Products Sold

Segment cost of products sold in 2006 increased
17.5 percent from 2005, which was primarily attributable to
the costs associated with Antinori products in connection with
the aforementioned distribution agreement, as well as overall
increased case volume and the impact of higher costs per case.

Gross Margin

|                                 |  |              |        |                     |  |        |        |   |  |   |       |  |  |  |     | 
|-------------------------------- |  | ------------ | ------ | ------------------- |  | ------ | ------ | - |  | - | ----- |  |  |  | --- | 
|                                 |  | Year Ended   |        |                    
|                                 |  | December 31, |        | Increase/(Decrease)
|                                 |  |              |        |                    
|                                 |  | 2006         |        | 2005                |  | Amount |        | %
|                                 |  |              |        |                    
|                                
|                                
|                                
|                                
|Gross Margin                     |  | $            | 99,418 |                     |  | $      | 92,618 |   |  | $ | 6,800 |  |  |  | 7.3 | 
|                                
|                                
|                                
|                                
|Gross Margin as a % of Net Sales |  |              | 35.2   | %                   |  |        | 37.3   | % |  |   |       |  |  |  |     | 



SA&A Expenses




| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher salaries and related costs, due to the continued sales
    force expansion associated with broadening distribution of the
    Companys wines throughout the domestic market;                                  
| |  | Increased direct and indirect selling and advertising expenses
    related to costs for marketing and
    point-of-sale
    advertising for the Chateau Ste. Michelle, Columbia Crest and
    Red Diamond brands; and,
| |  | Higher administrative spending, primarily professional fees and
    share-based compensation expense.                                                                                                                 



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The positive impact of income from the Companys Col Solare
    joint venture;                                                                                  
| |  | The favorable impact of a cooperative arrangement for
    advertising and promotional expenses related to the
    Companys distribution of Antinori wines; and,
| |  | A $2.5 million pre-tax gain recognized in the first quarter
    of 2006 in connection with the sale of winery property located
    in California.               

2005 compared with 2004


|                 |  |              |         |                     |  |        |         |   |  |   |        |  |  |  |      | 
|---------------- |  | ------------ | ------- | ------------------- |  | ------ | ------- | - |  | - | ------ |  |  |  | ---- | 
|                 |  | Year Ended   |         |                    
|                 |  | December 31, |         | Increase/(Decrease)
|                 |  |              |         |                    
|                 |  | 2005         |         | 2004                |  | Amount |         | %
|                 |  |              |         |                    
|                
|                
|                
|                
|Net sales        |  | $            | 248,342 |                     |  | $      | 226,650 |   |  | $ | 21,692 |  |  |  | 9.6  | 
|                
|                
|                
|                
|Operating profit |  |              | 37,764  |                     |  |        | 32,382  |   |  |   | 5,382  |  |  |  | 16.6 | 

Net Sales






35







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##### Table of Contents

Managements Discussion and Analysis(Continued)

Case Volume

Percentage of Total Case Volume by Brand

|                |  |  |                
|--------------- |  |  | ---------------
|               
|               
|               
|               
|2005(PIE CHART) |  |  | 2004(PIE CHART)

Restaurant Wine Wine &
Spirits


Cost of Products Sold




Gross Margin


|                                 |  |              |        |                     |  |        |        |   |  |   |       |  |  |  |     | 
|-------------------------------- |  | ------------ | ------ | ------------------- |  | ------ | ------ | - |  | - | ----- |  |  |  | --- | 
|                                 |  | Year Ended   |        |                    
|                                 |  | December 31, |        | Increase/(Decrease)
|                                 |  |              |        |                    
|                                 |  | 2005         |        | 2004                |  | Amount |        | %
|                                 |  |              |        |                    
|                                
|                                
|                                
|                                
|Gross Margin                     |  | $            | 92,618 |                     |  | $      | 85,913 |   |  | $ | 6,705 |  |  |  | 7.8 | 
|                                
|                                
|                                
|                                
|Gross Margin as a % of Net Sales |  |              | 37.3   | %                   |  |        | 37.9   | % |  |   |       |  |  |  |     | 



SA&A Expenses




| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Higher salaries and related costs, due to the continued sales
    force expansion associated with broadening distribution of the
    Companys wines throughout the domestic market.



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Lower advertising costs, predominately print advertising
    costs; and
| |  | Slightly lower administrative and other spending.                      






36







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##### Table of Contents

10K


ALL OTHER OPERATIONS

2006 compared with 2005

|                      |  |              |        |            |  |        |        |   |  |   |       |  |  |  |      | 
|--------------------- |  | ------------ | ------ | ---------- |  | ------ | ------ | - |  | - | ----- |  |  |  | ---- | 
|                      |  | Year Ended   |        | Increase/ 
|                      |  | December 31, |        | (Decrease)
|                      |  |              |        |           
|                      |  | 2006         |        | 2005       |  | Amount |        | %
|                      |  |              |        |           
|Net sales             |  | $            | 45,822 |            |  | $      | 41,876 |   |  | $ | 3,946 |  |  |  | 9.4  | 
|                     
|                     
|                     
|                     
|Restructuring charges |  |              | 151    |            |  |        |       |   |  |   | 151   |  |  |  |     | 
|                     
|                     
|                     
|                     
|Operating profit      |  |              | 15,952 |            |  |        | 14,338 |   |  |   | 1,614 |  |  |  | 11.3 | 



2005 compared with 2004


|                 |  |              |        |            |  |        |        |   |  |   |       |  |  |  |      | 
|---------------- |  | ------------ | ------ | ---------- |  | ------ | ------ | - |  | - | ----- |  |  |  | ---- | 
|                 |  | Year Ended   |        | Increase/ 
|                 |  | December 31, |        | (Decrease)
|                 |  |              |        |           
|                 |  | 2005         |        | 2004       |  | Amount |        | %
|                 |  |              |        |           
|                
|                
|                
|                
|Net sales        |  | $            | 41,876 |            |  | $      | 36,334 |   |  | $ | 5,542 |  |  |  | 15.3 | 
|                
|                
|                
|                
|Operating profit |  |              | 14,338 |            |  |        | 10,266 |   |  |   | 4,072 |  |  |  | 39.7 | 



UNALLOCATED CORPORATE


2006 compared with 2005


Administrative Expenses




Restructuring Charges




Interest Expense






37







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##### Table of Contents

Managements Discussion and Analysis(Continued)

from cash equivalent and short-term investments due to higher
interest rates, partially offset by lower average levels of
investments.

Income Tax Expense

The Company recorded income tax expense on earnings from
continuing operations of $291.1 million in 2006 compared to
$293.3 million in 2005. Income tax expense in both 2006 and
2005 reflect the favorable impact of the net reversal of income
tax accruals of $4.7 million and $18 million, net of
federal income tax benefit, respectively. The reversal of income
tax accruals resulted from 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 was 36.7 percent in 2006,
compared to 35.4 percent in 2005. The increase in the
effective tax rate was primarily as a result of the
aforementioned reversal of accruals recognized in the prior year
period.

2005 compared with 2004

Administrative Expenses

Unallocated corporate administrative expenses decreased
5.9 percent in 2005, as compared to 2004, primarily 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.

Interest Expense

Net interest expense decreased $24.4 million or
32.6 percent in 2005, as compared to 2004, primarily as a
result of lower levels of debt outstanding due to the
aforementioned $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 and
short-term investments due to higher interest rates, partially
offset by lower average levels of investments.

Income Tax Expense

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. The reversal of income tax accruals resulted from
changes in facts and circumstances, including the settlement of
various income tax audits by the 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 for both years 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.

OUTLOOK

SMOKELESS TOBACCO SEGMENT

Category Growth

The Company remains committed to its category growth
initiatives, which continue to be successful, demonstrated by a
strong growth rate in 2006, according to
RAD-SVT data. According
to recent data from ACNielsen, moist smokeless tobacco is one of
the fastest growing consumer package goods categories at retail.
In addition, consumer research indicates in 2006, the number of
new adult consumers entering the moist smokeless tobacco
category continued to increase, bringing the total adult
consumer base to over 6 million from 4.7 million in
2001, a majority of which entered in the premium segment. In
light of the success of the Companys category growth
initiatives achieved to date, as well as the favorable impact to
the category from the Companys premium brand loyalty
initiative (discussed further below), going forward the Company
expects that these initiatives will continue to expand the adult
consumer base and attract new adult



38



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##### Table of Contents

10K


consumers, primarily smokers, to the category and to premium
brands. The Company will continue to utilize its direct mail
marketing program to promote the discreetness and convenience of
smokeless tobacco relative to cigarettes to adult smokers, as
well as product innovation, which the Company believes have both
contributed to category growth in the last few years. The
Company expects category growth in the range of 5 percent
to 6 percent in 2007.

Premium Brand Loyalty

The Company intends to expand upon its premium brand loyalty
initiative during 2007, with a focus on growth of underlying
premium net unit volume. The Company expects to benefit from the
presence of an extra billing day in the fourth quarter of 2007.
Excluding the impact of the extra billing day, premium net unit
volume is anticipated to grow by approximately 1 percent
for the year. Based on the success of the initiative in 2006,
which resulted in premium volume stabilization, the Company
plans to spend an additional $31 million in 2007, above the
amount spent in 2006.

State Excise Taxes

The Company intends to continue its efforts to promote tax
equity in the forty states that currently impose excise taxes on
smokeless tobacco products expressed as a percentage of the
wholesale price (ad valorem) rather than on the
basis of weight. As a result of these efforts, three additional
states recently converted to a tax based on weight, bringing the
total number of tax equity states to 10, along with the
federal government. In addition, the State of Washington
Department of Revenue intends to work towards the enactment of a
weight-based tax to avoid the risk of litigation inherent in the
current ad valorem system. The Company believes that ad valorem
excise taxes on smokeless tobacco products artificially drive
consumer behavior and create market distortions by providing a
tax preference for lower priced products. Weight-based excise
taxes or specific taxes on smokeless tobacco products would, in
the Companys opinion, allow products to compete fairly in
the marketplace on the basis of price and product attributes,
not the relative tax burden. The Company believes its support of
weight-based state excise taxes on smokeless tobacco products is
in the best interest of the Company, its wholesaler customers,
adult consumers of the Companys moist smokeless tobacco
products and the state governments.

Cost Savings

With the category growth and premium brand loyalty initiatives
providing the desired results during 2006, the Company increased
its focus on identifying opportunities for operational
efficiencies and cost savings, the result of which was the
Companys previously discussed cost-reduction initiative,
Project Momentum. The Company realized approximately
$15 million in savings related to Project Momentum during
2006. The overall savings achieved from the implementation of
Project Momentum, which are targeted to be at least
$100 million over its first three years, are expected to
create additional resources for the Companys growth, as
well as additional flexibility in the increasingly competitive
smokeless tobacco category. The potential resources for growth
and flexibility will be further enhanced in 2007 by the sale of
the building in which the Companys corporate headquarters
are currently located. The $100 million targeted savings
does not include the pre-tax gain of approximately
$105 million, and net cash proceeds of approximately
$85 million, expected to be realized in connection with the
closing of such sale. The closing is anticipated to occur in the
first quarter of 2007. The Company expects to discuss the
intended use of such proceeds when it releases its results for
the first quarter of 2007. Excluding the impact from the
anticipated sale of the headquarters building, the Company
expects to realize savings related to Project Momentum of at
least $45 million in 2007, with a potential for up to an
additional $20 million, which is reflected in the
Companys 2007 estimated range for diluted earnings per
share.

WINE SEGMENT

The Wine segment enters 2007 coming off another year of record
performance for both net sales and operating profit during 2006.
The Wine segment forecasts continued strong growth for both net
sales and operating profit in 2007. Favorable acclaim received
for products late in 2006 are expected to benefit net sales into
2007. In addition, revenues for the Wine segment are expected to
continue to be favorably impacted by



39



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##### Table of Contents

Managements Discussion and Analysis(Continued)

the aforementioned strategic alliance with Antinori, with a more
significant impact expected in the first half of 2007, since the
first half of 2006 did not reflect net sales of the Antinori
brands. However, due to planned reinvestment of incremental
profits generated from the Antinori alliance for advertising and
promotion during its first two years, the impact to Wine segment
operating profit is expected to be somewhat lower. Revenues are
also expected to be favorably impacted from sales of the
recently acquired Erath label, primarily Pinot Noir from Oregon,
which the Company began selling late in the third quarter of
2006, resulting in a favorable impact to segment net sales and
operating profit in 2007.

CONSOLIDATED

The Companys previously communicated 2007 estimate of
diluted earnings per share reflected a range of $3.25 to $3.40,
with a target of $3.30. This estimate excluded the impact of the
sale of the building in which its corporate headquarters are
currently located, as well as additional restructuring charges
associated with Project Momentum, as management was not able, in
good faith, to make a determination of the estimated amounts or
range of amounts, to be recognized in connection with these
items. On February 1, 2007, the Company entered into a
definitive agreement to sell its headquarters building, for
which it expects to recognize an estimated pre-tax gain of
approximately $105 million, or $.41 per diluted share,
upon closing in the first quarter of 2007. The impact on
full-year 2007 results related to this transaction is expected
to be approximately $.39 per diluted share, reflecting the
impact of a short-term lease with an imputed fair market value
of approximately $6.7 million. On or before the date of its
first quarter 2007 earnings release, the Company will provide an
update to its full-year 2007 estimate of diluted earnings per
share, reflecting the impact of the headquarters sale, along
with any additional restructuring charges under Project
Momentum, once any related actions are finalized and committed
to by the Company. Diluted earnings per share are anticipated to
reflect larger percentage increases in the first and fourth
quarters of 2007, as compared to the corresponding prior year
periods, due to the expected gain from the sale of the
Companys headquarters building and the presence of the
aforementioned extra billing day in the Smokeless Tobacco
segment, respectively. Over the long-term, the Companys
goal is to provide a total shareholder return of at least
10 percent, including diluted earnings per share growth and
a strong dividend yield.

LIQUIDITY AND CAPITAL RESOURCES

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

SUMMARY

|                          |  |      |         |      |  |      |         |  |  |   |           | 
|------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | --------- | 
|                          |  |     
|                          |  | 2006 |         | 2005 |  | 2004
|                          |  |     
|Cash and cash equivalents |  | $    | 254,393 |      |  | $    | 202,025 |  |  | $ | 450,202   | 
|                         
|                         
|                         
|                         
|Short-term investments    |  |      | 20,000  |      |  |      | 10,000  |  |  |   | 60,000    | 
|                         
|                         
|                         
|                         
|Working capital           |  |      | 698,033 |      |  |      | 630,776 |  |  |   | 554,260   | 
|                         
|                         
|                         
|                         
|Total debt                |  |      | 840,000 |      |  |      | 840,000 |  |  |   | 1,140,000 | 



35-day







40







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##### Table of Contents

10K


CASH FLOWS

|                                                     |  |                         |          |      |  |      |          |   |  |   |          |  
|---------------------------------------------------- |  | ----------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                     |  | Year Ended December 31,
|                                                     |  |                        
|                                                     |  | 2006                    |          | 2005 |  | 2004
|                                                     |  |                        
|Net cash provided by (used
    in):                  |  |                         |          |      |  |      |          |   |  |   |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|Operating activities                                 |  | $                       | 596,856  |      |  | $    | 560,699  |   |  | $ | 565,415  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Investing activities                                 |  |                         | (55,063  | )    |  |      | (17,005  | ) |  |   | (118,370 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Financing activities                                 |  |                         | (489,425 | )    |  |      | (791,871 | ) |  |   | (429,883 | )
|                                                     |  |                        
|Increase (decrease) in cash and
    cash equivalents |  | $                       | 52,368   |      |  | $    | (248,177 | ) |  | $ | 17,162   |  
|                                                     |  |                        

Operating Activities






| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Purchase of leaf tobacco of $68.5 million; and,                            
| |  | Grape and bulk wine purchases and grape harvest costs of
    $72.5 million.



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Purchase of leaf tobacco of $76.4 million; and,                            
| |  | Grape and bulk wine purchases and grape harvest costs of
    $64.5 million.



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | A $200 million cash payment as part of the resolution of an
    antitrust action brought by a smokeless tobacco competitor;
| |  | Purchase of leaf tobacco of $86.7 million; and,                                                                            
| |  | Grape and bulk wine purchases and grape harvest costs of
    $58.5 million.                                                

Investing Activities




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Purchases of property, plant and equipment of $37 million;                                                       
| |  | Acquisition of the Erath winery for $10.6 million;                                                               
| |  | Net purchases of short-term investments of $10 million; and,                                                     
| |  | Investment in Col Solare joint venture of $3.6 million,
    related to the construction of a new winery facility.



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | Proceeds from the disposition of property, plant and equipment
    of $6.2 million.



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | Purchase of property, plant and equipment of $89.9 million,
    including the replacement of Company aircraft.






41







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##### Table of Contents

Managements Discussion and Analysis(Continued)

Reduced by:


    Net proceeds of $50 million from the sale of certain
    short-term investments; 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.Net cash used in investing activities of $118.4 million in
2004 reflected the following:


    Purchase of property, plant and equipment of $70.3 million,
    including initial payment for the replacement of Company
    aircraft; and,
    Net purchases of short-term investments of $55 million.Reduced by:


    Proceeds from the disposition of property, plant and equipment
    of $7 million.Financing Activities

Net cash used in financing activities of $489.4 million in
2006 was lower than the net cash used in financing activities in
2005, mainly due to the aforementioned $300 million
repayment of senior notes in 2005. The amount of dividends paid
during 2006 increased $6.3 million, as compared to 2005, as
the impact of a 3.6 percent dividend increase in 2006 was
partially offset by a lower level of shares outstanding as a
result of repurchases of common stock under the Companys
share repurchase program. The following provides details of net
cash used in financing activities in 2006:


    Cash dividends of $367.5 million paid during the year;
    Payments for the repurchase of Company common stock of
    $200 million;
    Proceeds from the issuance of stock of $68.2 million
    related to stock option exercise activity; and,
    The actual tax benefit realized by the Company related to the
    exercise of stock options, in excess of the tax deduction that
    would have been recorded had the fair value method of accounting
    for stock options been applied to all stock option grants,
    amounting to $9.9 million. In accordance with
    SFAS No. 123(R), this amount is presented as a
    financing inflow, with an equal amount reported as an outflow in
    cash flows from operating activities.The following provides details of net cash used in financing
activities in 2005:


    $300 million repayment of senior notes, upon maturity, in
    March 2005;
    Cash dividends of $361.2 million paid during the year;
    Payments for the repurchase of Company common stock of
    $200 million; and,
    Proceeds from the issuance of stock of $69.4 million
    related to stock option exercise activity.The following provides details of net cash used in financing
activities in 2004:


    Cash dividends of $344.1 million paid during the year;
    Payments for the repurchase of Company common stock of
    $200 million; and,
    Proceeds from the issuance of stock of $114.3 million
    related to stock option exercise activity.SOURCES OF LIQUIDITY

Funds generated by operating activities, available cash and cash
equivalents, and short-term investments continue to be the
Companys most significant sources of liquidity. The
Company believes funds generated from the expected results of
operations, available cash and cash equivalents, and short-term
investments will be sufficient to finance strategic initiatives
in 2007. In addition, the Companys credit facility and its
access to capital markets may be used to supplement these
sources for additional working capital needs.

The Companys cash requirements in 2007 and beyond will be
primarily for the payment of dividends, repurchase of common
stock, purchases of inventory, capital expenditures and
repayment of borrowings (refer to the table under
Aggregate Contractual Obligations for details of
certain future cash requirements). The Company estimates that
amounts expended in 2007 for tobacco leaf purchases for moist
smokeless tobacco products will be slightly lower than amounts
expended in 2006, while grape and bulk wine purchases and grape
harvest costs for wine products will be greater than amounts in
the corresponding 2006 period.



42



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##### Table of Contents

10K


The Company is subject to various threatened and pending
litigation and claims, as disclosed in Part II,
Item 8, Financial Statements and Supplementary
Data  Notes to Consolidated Financial
Statements  Note 21, Contingencies. The
Company believes that the ultimate outcome of such litigation
and claims will not have a material adverse effect on its
consolidated results or its consolidated financial position,
although if plaintiffs in these actions were to prevail, the
effect of any judgment or settlement could have a material
adverse impact on its consolidated financial results in the
particular reporting period in which resolved and, depending on
the size of any such judgment or settlement, a material adverse
effect on its consolidated financial position.

Working Capital

The Companys working capital, which is the excess of
current assets over current liabilities, increased to
$698 million at December 31, 2006 as compared to
$630.8 million at December 31, 2005. The working
capital increase in 2006 was mainly attributable to higher
levels of cash and cash equivalents, inventories and short-term
investments. In addition, assets held for sale were higher as of
December 31, 2006 due to the planned disposal of certain
corporate assets in connection with Project Momentum, including
the building in which the Companys corporate headquarters
are currently located. The ratio of current assets to current
liabilities (current ratio) decreased slightly to 3.3 to 1
from 3.4 to 1, as the percentage increase in current
liabilities was higher than that of current assets, mainly due
to increased accounts payable and accrued expenses due to timing
of payments.

Credit Facility

The Company has a $300 million three-year credit facility
(the Credit Facility) which expires in July 2007.
The Company expects to replace the Credit Facility with a
similar facility on or before its expiration. The 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 Credit Facility is determined based on an interest rate,
within a range of rates, dependent upon the Companys
senior unsecured debt rating. The commitment fee currently
payable is .15 percent per annum. This Credit Facility was
executed primarily to support commercial paper borrowings. The
Company had no direct borrowings under the Credit Facility or
commercial paper borrowings at December 31, 2006. For
additional information see Part II, Item 8,
Financial Statements and Supplementary Data 
Notes to Consolidated Financial Statements 
Note 9, Borrowing Arrangements.

Credit Ratings

|                  |  |        |    |         |  |  |        | 
|----------------- |  | ------ | -- | ------- |  |  | ------ | 
|Rating Agency     |  | Rating |    | Outlook
|                 
|                 
|                 
|                 
|                 
|Moodys           |  |        | A3 |         |  |  | Stable | 
|                 
|                 
|                 
|                 
|Standard & Poors |  |        | A  |         |  |  | Stable | 



10-K.


CAPITAL EXPENDITURES









43







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##### Table of Contents

Managements Discussion and Analysis(Continued)

Major areas of capital spending from 2004 through 2006 by
segment were:

Smokeless Tobacco segment:




    Manufacturing, processing and packaging equipment;
    Retail marketing display fixtures;
    Computer equipment and software;
    Building improvements and renovations; and,
    Company aircraft.Wine segment:




    Wine barrels and storage tanks;
    Wine making and processing equipment; and,
    Facilities expansion and renovations.2004 - 2006 Average Capital Expenditure

(GRAPH)

As of December 31, 2006, the Companys planned capital
expenditures for 2007 are expected to be approximately
$82 million, for a range of projects, including
manufacturing, processing and packaging equipment for the
smokeless tobacco business and barrels and storage tanks for the
wine business, as well as expenditures related to the relocation
of the Companys headquarters later in the year. In
addition, the Company expects to receive approximately
$85 million in net proceeds in the first quarter of 2007
upon the closing of the sale of the building in which the
Companys corporate headquarters are currently located.

DEBT

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

In March 2000, the Company issued $300 million aggregate
principal amount of 8.8 percent fixed rate senior notes,
with interest payable semiannually. As previously noted, 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. The Company effectively fixed
the interest rate on the $40 million in long-term floating
rate senior notes at 7.25 percent through the execution of
an interest rate swap. These notes mature on June 1, 2009,
with interest payable semiannually and quarterly on the fixed
and floating rate notes, respectively.

SHARE REPURCHASES AND DIVIDENDS

In December 2004, the Companys Board of Directors
authorized a program under which the Company may repurchase up
to 20 million shares of its outstanding common stock. The
plan was approved to allow for the repurchase of additional
shares, as the number of shares repurchased under a previous
program were nearing the maximum authorized amount. The maximum
allowable repurchase of 20 million shares under this
previous



44



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##### Table of Contents

10K


program was reached during 2005, at which time the Company began
repurchasing outstanding shares of its common stock under the
December 2004 program. Through December 31, 2006,
approximately 7.1 million shares have been repurchased at a
cost of approximately $317 million under the December 2004
program. During each of the years 2006, 2005 and 2004, the
Company spent $200 million under its share repurchase
programs for the repurchase of Company common stock. The Company
expects to spend $200 million again in 2007 to repurchase
its common shares. Stock prices, market conditions and other
factors will determine the actual number of shares repurchased.

During 2006, the Company paid quarterly cash dividends to
stockholders of 57 cents per share, for an annual total of
$2.28 per share, or an aggregate amount of
$367.5 million. The dividend paid per share during 2006
represented an increase of 3.6 percent over the dividend
paid in 2005. In December 2006, the Board of Directors increased
the Companys first quarter 2007 dividend to stockholders
to 60 cents per share, with an indicated annual rate of
$2.40 per share. This represents a 5.3 percent
increase over the dividend paid in 2006.

During 2006, the Company returned a total of $567.5 million
to stockholders through share repurchases and dividend payments.
On average, over the past three years the Company has returned
approximately 97 percent of cash flow from operating
activities to stockholders through share repurchases and
dividend payments.

AGGREGATE CONTRACTUAL OBLIGATIONS

|                                   |  |                        |           |        |  |        |         |        |  |         |         |  |  |   |         |  |  |   |         | 
|---------------------------------- |  | ---------------------- | --------- | ------ |  | ------ | ------- | ------ |  | ------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                   |  | 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 | 
|                                  
|                                  
|                                  
|                                  
|Interest on long-term debt         |  |                        | 282,002   |        |  |        | 57,151  |        |  |         | 105,601 |  |  |   | 79,500  |  |  |   | 39,750  | 
|                                  
|                                  
|                                  
|                                  
|Operating leases                   |  |                        | 103,634   |        |  |        | 8,612   |        |  |         | 16,933  |  |  |   | 11,469  |  |  |   | 66,620  | 
|                                  
|                                  
|                                  
|                                  
|Open purchase
    orders(1)        |  |                        | 17,745    |        |  |        | 17,745  |        |  |         |        |  |  |   |        |  |  |   |        | 
|                                  
|                                  
|                                  
|                                  
|Unconditional purchase obligations |  |                        | 460,737   |        |  |        | 82,105  |        |  |         | 131,381 |  |  |   | 122,240 |  |  |   | 125,011 | 
|                                   |  |                        |           |        |  |        |         |        |  |         |         |  |  |   |         |  |  |   |         | 
|                                   |  | $                      | 1,704,118 |        |  | $      | 165,613 |        |  | $       | 493,915 |  |  | $ | 213,209 |  |  | $ | 831,381 | 
|                                   |  |                        |           |        |  |        |         |        |  |         |         |  |  |   |         |  |  |   |         | 



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amount represents contractual obligations for materials and
    services on order at December 31, 2006, but not yet
    delivered. These represent short-term obligations made in the
    ordinary course of business.



OFF-BALANCE SHEET ARRANGEMENTS




CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Estimates and Assumptions






45







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##### Table of Contents

Managements Discussion and Analysis(Continued)

liabilities and their related disclosure. The Company bases its
estimates on a number of factors, including historical
information and other assumptions that it believes are
reasonable under the circumstances. Actual results may differ
from these estimates in the event there are changes in related
conditions or assumptions. The development and selection of the
disclosed estimates have been discussed with the Audit Committee
of the Board of Directors. The following accounting policies are
deemed to be critical, as they require accounting estimates to
be made based upon matters that are highly uncertain at the time
such estimates are made.

The Company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.

Inventory

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.

Pension and Other Postretirement Benefit Plans

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(SFAS No. 87).
The Company adopted SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R)(SFAS No. 158), the provisions
of which did not impact its evaluation of assumptions in
accordance with SFAS No. 87. Changes in the related
pension expense and benefit obligation may occur in the future
as a result of changes in these assumptions. Pension expense was
approximately $33.7 million, $27.6 million and
$27.8 million for the years ended December 31, 2006,
2005 and 2004, respectively. On average, over the past three
years, excluding special termination charges recognized in 2006
in connection with Project Momentum, approximately
79 percent of pension expense was reflected in selling,
advertising and administrative expenses, while the remainder was
included in cost of products sold. The increase in pension
expense for 2006 was primarily the result of $4 million in
special termination benefits provided to certain individuals
terminated in connection with Project Momentum, which was
reflected in restructuring charges. 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 6 percent to calculate its
pension liabilities at December 31, 2006. This rate
approximates the rate at which current pension liabilities could
effectively be settled. At December 31, 2006, actuarial
losses recognized in accumulated other comprehensive income,
including those associated with pension plan asset performance,
were approximately $81.7 million. These losses will be
amortized over the applicable remaining service period which is
approximately 11 years. The Company made a discretionary
contribution of $0.4 million to one of its qualified
pension plans in 2006. In addition, during 2006, the Company
made contributions of $6 million to its non-qualified
pension plans. The Company expects to contribute
$7.2 million to these non-qualified pension plans in 2007.
The impact of a higher discount rate, as well as lower
amortization of actuarial losses, is expected to result in lower
pension expense for 2007. The



46



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##### Table of Contents

10K


following provides a sensitivity analysis, which demonstrates
the effects that adverse changes in actuarial assumptions would
have had on 2006 pension expense. A 50 basis point decrease
in the expected long-term rate of return on plan assets would
increase pension expense by approximately $1.5 million,
while the same basis point decrease in the discount rate would
result in an increase of approximately $4.3 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. Expense related to
these plans was approximately $9 million for each of the
years ended December 31, 2006 and 2005 and
$5.6 million for the year ended December 31, 2004. 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, in accordance with
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions (SFAS
No. 106). Future changes in the related
postretirement benefit expense may be impacted by changes in
these assumptions. The Companys aforementioned adoption of
SFAS No. 158 did not impact its evaluation of
assumptions in accordance with SFAS No. 106. The
Company used a discount rate of 6 percent to calculate its
postretirement benefit obligation at December 31, 2006,
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, 2006 is assumed to be
8 percent in 2007 and is expected to decrease gradually to
4.5 percent by 2013 and remain level thereafter. The
following provides a sensitivity analysis demonstrating the
impact that a 100 basis point increase or decrease in the
assumed health care cost trend rate would have on both the
postretirement benefit obligation and the related expense. A
100 basis point increase in the assumed health care cost
trend rate would increase the accumulated postretirement benefit
obligation and related expense by approximately
$12.4 million and $1.8 million, respectively. A
100 basis point decrease in the assumed health care cost
trend rate would decrease the accumulated postretirement benefit
obligation and related expense by approximately
$10.9 million and $1.5 million, respectively.

Sales Returns

The Companys primary business, which is the manufacture
and sale of moist smokeless tobacco, sells products with
expiration dates relative to freshness. 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 6.3 percent,
5.6 percent and 5 percent of annual moist smokeless
tobacco can gross sales for the years ended December 31,
2006, 2005 and 2004, 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. Higher levels of promotional
activity associated with the implementation of the premium brand
loyalty initiative also contributed to the increase from 2005 to
2006. Significant increases or decreases 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, 2006 and 2005 totaled $17.6 million and
$16.6 million, respectively.

Contingencies

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 Part II, Item 8, Notes to the
Consolidated Financial Statements  Note 21,
Contingencies, for disclosure of the Companys
assessment related to pending litigation matters.



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##### Table of Contents

Managements Discussion and Analysis(Continued)

Income Taxes

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, Accounting for
Contingencies(SFAS No. 5), 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. In June 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting
and disclosure for uncertainty in tax positions, as defined.
FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of the recognition and measurement related
to accounting for income taxes. In that regard, FIN 48
amends SFAS No. 5 to eliminate its applicability to
income taxes. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company does not
expect the interpretation will have a material impact on its
results from operations or financial position.

NEW ACCOUNTING STANDARDS

The Company reviews new accounting standards to determine the
expected financial impact, if any, that the adoption of each
such standard will have. As of the filing of this
Form 10-K, there
were no new accounting standards issued that were projected to
have a material impact on the Companys consolidated
financial position, results of operations or liquidity. Refer to
Part II, Item 8, Financial Statements and
Supplementary Data  Notes to Consolidated Financial
Statements  Note 2, Recent Accounting
Pronouncements, for further information regarding new
accounting standards.

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.

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.



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10K


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:


    The risk factors described under Part I, Item 1A,
    Risk Factors, of this
    Form 10-K;
    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 warning notices, ingredients and constituent
    disclosure requirements, flavorings, advertising and promotion,
    adult sampling and minimum age of purchase;
    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;
    Global supply of grapes;
    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
    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 a combination of fixed
rate and floating rate debt, as well as 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, 2006 and 2005, the Company had
$800 million in fixed rate senior notes and
$40 million in floating rate senior notes outstanding. The
fixed rate senior notes outstanding at December 31, 2006
and 2005 were comprised of long-term notes of $600 million
and $200 million bearing interest rates of
6.625 percent and 7.25 percent, respectively. 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 interest rate swap at
December 31, 2006 was a net liability of $1.1 million,
based on a dealer quote, and considering current market rates.
The Company has completed 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
2006 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, 2006, the fair value of the interest rate swap
would increase by approximately $0.9 million to a net
liability of $0.2 million. Conversely, a 100 basis
point decrease in that rate would decrease the fair value of the
swap by $0.9 million to a net liability of $2 million.

The fair value of the Companys fixed rate senior notes at
December 31, 2006 was $841.4 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. As an indication of these notes
sensitivity to changes in interest rates, based upon an
immediate 100 basis point increase in the



49



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##### Table of Contents

Managements Discussion and Analysis(Continued)

applicable interest rates at December 31, 2006, the fair
value of the Companys fixed rate senior notes would
decrease by approximately $33 million. Conversely, a
100 basis point decrease in that rate would increase the
fair value of these notes by $34.8 million.

During 2006, the Company entered into a forward starting
interest rate swap to hedge against the variability of
forecasted interest payments attributable to changes in interest
rates through the date of an anticipated debt issuance in 2009.
The forward starting interest rate swap has a notional amount of
$100 million and the terms call for the Company to receive
interest quarterly at a variable rate equal to the London
InterBank Offered Rate (LIBOR) and to pay interest
semi-annually at a fixed rate of 5.715 percent. The Company
expects that the forward starting swap will be perfectly
effective in offsetting the variability in the forecasted
interest rate payments, as, at inception, the critical terms of
the forward starting swap exactly match the critical terms of
the expected debt issuance. This forward starting swap has the
effect of fixing the interest rate on an anticipated
$100 million debt issuance in 2009. The fair value of the
forward starting interest rate swap at December 31, 2006
was a net liability of $3.1 million, based on a dealer
quote, and considering current market rates. As an indication of
the forward starting swaps sensitivity to changes in
interest rates, based upon an immediate 100 basis point
increase in the applicable interest rate at December 31,
2006, the fair value of the forward starting swap would increase
by approximately $6.5 million to a net asset of
$3.4 million. Conversely, a 100 basis point decrease
in that rate would decrease the fair value of these notes by
$7.5 million to a net liability of $10.6 million.

Taking into account the Companys floating rate senior
notes payable and interest rate swap outstanding at
December 31, 2006, 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, 2006.

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.

Foreign Currency Risk

The Company occasionally enters 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 no foreign currency forward contracts
outstanding at December 31, 2006.

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, 2006, the Company had
approximately $249.8 million invested in these instruments.

Short-term investments at December 31, 2006 of
$20 million 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.

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 in Item 7 for additional
details.



50



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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, 2006 and
2005, and the related consolidated statements of operations,
cash flows and changes in stockholders equity for each of
the three years in the period ended December 31, 2006. 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, 2006 and
2005, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2006, 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.

As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment. Also, as discussed in Note 14 to the
consolidated financial statements, effective December 31,
2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans.

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, 2006, 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 22, 2007
expressed an unqualified opinion thereon.





Stamford, Connecticut

February 22, 2007





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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that UST Inc. maintained effective internal
control over financial reporting as of December 31, 2006,
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, 2006, 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, 2006
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, 2006 and 2005 and the related consolidated
statements of operations, cash flows and changes in
stockholders equity for each of the three years in the
period ended December 31, 2006 of UST Inc. and our report
dated February 22, 2007 expressed an unqualified opinion
thereon.





Stamford, Connecticut

February 22, 2007





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10K


UST INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

|                                                                            |                                                |                              |           |         |           |      |           |         |         |   |           |         |         | 
|--------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------- | --------- | ------- | --------- | ---- | --------- | ------- | ------- | - | --------- | ------- | ------- | 
|                                                                            |                                                | Year Ended December 31      
|                                                                            |                                                |                             
|                                                                            |                                                | 2006                         |           | 2005    |           | 2004
|                                                                            |                                                |                             
|Net sales                                                                   |                                                | $                            | 1,850,911 |         |           | $    | 1,851,885 |         |         | $ | 1,838,238 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Costs and expenses:                                                         |                                                |                              |           |         |           |      |           |         |         |   |           |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cost of products sold                          |                              |           | 412,971 |           |      |           | 392,670 |         |   |           | 363,357 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Excise taxes                                   |                              |           | 53,117  |           |      |           | 50,461  |         |   |           | 49,284  |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Selling, advertising and
    administrative    |                              |           | 525,990 |           |      |           | 518,797 |         |   |           | 513,570 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Restructuring charges                          |                              |           | 21,997  |           |      |           |        |         |   |           |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Antitrust litigation                           |                              |           | 2,025   |           |      |           | 11,762  |         |   |           | (582    | )      
|                                                                            |                                                |                             
|                                                                            |                                                | Total costs and
    expenses |           |         | 1,016,100 |      |           |         | 973,690 |   |           |         | 925,629 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Operating income                                                            |                                                |                              | 834,811   |         |           |      | 878,195   |         |         |   | 912,609   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest, net                                                               |                                                |                              | 41,785    |         |           |      | 50,578    |         |         |   | 75,019    |        
|                                                                            |                                                |                             
|Earnings from continuing
    operations before income taxes                 |                                                |                              | 793,026   |         |           |      | 827,617   |         |         |   | 837,590   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Income tax expense                                                          |                                                |                              | 291,060   |         |           |      | 293,349   |         |         |   | 299,538   |        
|                                                                            |                                                |                             
|Earnings from continuing
    operations                                     |                                                |                              | 501,966   |         |           |      | 534,268   |         |         |   | 538,052   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Income (loss) from discontinued
    operations, including income tax effect |                                                |                              | 3,890     |         |           |      |          |         |         |   | (7,215    | )      
|                                                                            |                                                |                             
|Net earnings                                                                |                                                | $                            | 505,856   |         |           | $    | 534,268   |         |         | $ | 530,837   |        
|                                                                            |                                                |                             
|Net earnings per basic
    share:                                           |                                                |                              |           |         |           |      |           |         |         |   |           |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Earnings from continuing operations            |                              | $         | 3.13    |           |      | $         | 3.26    |         |   | $         | 3.26    |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Income (loss) from discontinued
    operations |                              |           | 0.02    |           |      |           |        |         |   |           | (0.05   | )      
|                                                                            |                                                |                             
|Net earnings per basic
    share:                                           |                                                | $                            | 3.15      |         |           | $    | 3.26      |         |         | $ | 3.21      |        
|                                                                            |                                                |                             
|Net earnings per diluted
    share:                                         |                                                |                              |           |         |           |      |           |         |         |   |           |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Earnings from continuing operations            |                              | $         | 3.10    |           |      | $         | 3.23    |         |   | $         | 3.23    |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Income (loss) from discontinued
    operations |                              |           | 0.02    |           |      |           |        |         |   |           | (0.04   | )      
|                                                                            |                                                |                             
|Net earnings per diluted
    share:                                         |                                                | $                            | 3.12      |         |           | $    | 3.23      |         |         | $ | 3.19      |        
|                                                                            |                                                |                             
|Dividends per share                                                         |                                                | $                            | 2.28      |         |           | $    | 2.20      |         |         | $ | 2.08      |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Average number of
    shares:                                               |                                                |                              |           |         |           |      |           |         |         |   |           |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Basic                                          |                              |           | 160,772 |           |      |           | 163,949 |         |   |           | 165,164 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Diluted                                        |                              |           | 162,280 |           |      |           | 165,497 |         |   |           | 166,622 |        




The accompanying notes are integral to the Consolidated
Financial Statements.




53







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UST INC.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(In thousands)

|                                                |                                               |                                                |           |           |           |  |           |           |           | 
|----------------------------------------------- | --------------------------------------------- | ---------------------------------------------- | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                                |                                               | December 31                                   
|                                                |                                               |                                               
|                                                |                                               | 2006                                           |           | 2005     
|                                                |                                               |                                               
|Assets:                                         |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                     |                                                | $         | 254,393   |           |  | $         | 202,025   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Short-term investments                        |                                                |           | 20,000    |           |  |           | 10,000    |          
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable                           |                                                |           | 52,501    |           |  |           | 54,186    |          
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories                                   |                                                |           | 601,258   |           |  |           | 583,407   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred income taxes                         |                                                |           | 11,370    |           |  |           | 11,622    |          
|                                               
|                                               
|                                               
|                                               
|                                                | Income taxes receivable                       |                                                |           |          |           |  |           | 2,400     |          
|                                               
|                                               
|                                               
|                                               
|                                                | Assets held for sale                          |                                                |           | 31,452    |           |  |           | 3,433     |          
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses and other current
    assets |                                                |           | 27,136    |           |  |           | 22,481    |          
|                                                |                                               |                                               
|                                                |                                               | Total current assets                           |           |           | 998,110   |  |           |           | 889,554   | 
|                                               
|                                               
|                                               
|                                               
|Property, plant and equipment,
    net          |                                               |                                                | 389,810   |           |           |  | 431,168   |          
|                                               
|                                               
|                                               
|                                               
|Deferred income taxes                           |                                               |                                                | 26,239    |           |           |  |          |          
|                                               
|                                               
|                                               
|                                               
|Other assets                                    |                                               |                                                | 26,189    |           |           |  | 46,261    |          
|                                                |                                               |                                               
|                                                |                                               | Total assets                                   |           | $         | 1,440,348 |  |           | $         | 1,366,983 | 
|                                                |                                               |                                               
|                                               
|                                               
|                                               
|                                               
|Liabilities and
    Stockholders Equity:       |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable and accrued
    expenses     |                                                | $         | 268,254   |           |  | $         | 231,061   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Income taxes payable                          |                                                |           | 18,896    |           |  |           | 12,566    |          
|                                               
|                                               
|                                               
|                                               
|                                                | Litigation liability                          |                                                |           | 12,927    |           |  |           | 15,151    |          
|                                                |                                               |                                               
|                                                |                                               | Total current
    liabilities                  |           |           | 300,077   |  |           |           | 258,778   | 
|                                               
|                                               
|                                               
|                                               
|Long-term debt                                  |                                               |                                                | 840,000   |           |           |  | 840,000   |          
|                                               
|                                               
|                                               
|                                               
|Postretirement benefits other
    than pensions |                                               |                                                | 86,413    |           |           |  | 85,819    |          
|                                               
|                                               
|                                               
|                                               
|Pensions                                        |                                               |                                                | 142,424   |           |           |  | 92,159    |          
|                                               
|                                               
|                                               
|                                               
|Deferred income taxes                           |                                               |                                                |          |           |           |  | 11,972    |          
|                                               
|                                               
|                                               
|                                               
|Other liabilities                               |                                               |                                                | 5,608     |           |           |  | 3,157     |          
|                                                |                                               |                                               
|                                                |                                               | Total liabilities                              |           |           | 1,374,522 |  |           |           | 1,291,885 | 
|                                                |                                               |                                               
|Contingencies (see
    Note 21)                 |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|Stockholders
    equity:                       |                                               |                                                |           |           |           |  |           |          
|                                               
|                                               
|                                               
|                                               
|                                                | Capital
    stock(1)                          |                                                |           | 104,956   |           |  |           | 103,810   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                    |                                                |           | 1,036,237 |           |  |           | 945,466   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Retained earnings                             |                                                |           | 635,272   |           |  |           | 497,389   |          
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated other comprehensive loss          |                                                |           | (56,871   | )         |  |           | (17,802   | )        
|                                                |                                               |                                               
|                                                |                                               |                                                | 1,719,594 |           |           |  | 1,528,863 |          
|                                               
|                                               
|                                               
|                                               
|                                                | Less treasury
    stock(2)                    |                                                |           | 1,653,768 |           |  |           | 1,453,765 |          
|                                                |                                               |                                               
|                                                |                                               | Total stockholders
    equity                 |           |           | 65,826    |  |           |           | 75,098    | 
|                                                |                                               |                                               
|                                                |                                               | Total liabilities and
    stockholders equity |           | $         | 1,440,348 |  |           | $         | 1,366,983 | 
|                                                |                                               |                                               



|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Common Stock par value $.50 per share:
    Authorized  600 million shares;
    Issued  209,912,510 shares in 2006 and
    207,620,439 shares in 2005. Preferred Stock par value
    $.10 per share: Authorized  10 million
    shares; Issued  None.
|   
|(2) | 49,319,673 shares and 45,049,378 shares of treasury
    stock at December 31, 2006 and December 31, 2005,
    respectively.                                                                                                                             

The accompanying notes are integral to the Consolidated
Financial Statements.




54







---



##### Table of Contents

10K


UST INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

|                                                      |                                                                                         |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |          |         |          |          |  
|----------------------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------- | -------- | -------- | ------- | ------- | -------- | -------- | ------- | -------- | -------- | -
|                                                      |                                                                                         | Year Ended December 31                                         
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         | 2006                                                            |                                                                        | 2005                                                 |         | 2004   
|                                                      |                                                                                         |                                                                
|Operating Activities:                                 |                                                                                         |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net earnings                                                                            |                                                                 | $                                                                      | 505,856                                              |         |         | $        | 534,268  |         |         | $        | 530,837  |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net
    earnings to net cash provided by operating activities: |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |          |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Depreciation and amortization                                   |                                                                        |                                                      | 45,839  |         |          |          | 46,438  |         |          |          | 47,647  |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Share-based compensation expense                                |                                                                        |                                                      | 10,403  |         |          |          | 5,976   |         |          |          | 3,181   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Excess tax benefits from
    share-based compensation           |                                                                        |                                                      | (9,863  | )       |          |          |        |         |          |          |        |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Goodwill and intangible impairment                              |                                                                        |                                                      |        |         |          |          | 3,313   |         |          |          |        |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | (Gain) loss on disposition of
    property, plant and equipment |                                                                        |                                                      | (327    | )       |          |          | 8,911   |         |          |          | 2,946   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Deferred income taxes                                           |                                                                        |                                                      | (16,922 | )       |          |          | 19,167  |         |          |          | 100,767 |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Changes in operating assets and
    liabilities:                |                                                                        |                                                      |         |         |          |          |         |         |          |          |         |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Accounts receivable                                                    |                                                      |         | 1,685   |          |          |         | (12,724 | )        |          |         | 25,951   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Inventories                                                            |                                                      |         | (15,780 | )        |          |         | (16,247 | )        |          |         | (22,780  | )       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Prepaid expenses and other assets                                      |                                                      |         | 14,703  |          |          |         | 16,255  |          |          |         | 13,573   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Accounts payable, accrued expenses,
    pensions and other liabilities |                                                      |         | 40,541  |          |          |         | 6,757   |          |          |         | 51,172   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Income taxes                                                           |                                                      |         | 22,945  |          |          |         | (39,977 | )        |          |         | 27,918   |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 | Litigation liability                                                   |                                                      |         | (2,224  | )        |          |         | (11,438 | )        |          |         | (215,797 | )       
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         |                                                                 |                                                                        | Net cash provided by operating
    activities        |         |         | 596,856  |          |         |         | 560,699  |          |         |          | 565,415  |  
|                                                      |                                                                                         |                                                                
|Investing Activities:                                 |                                                                                         |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Short-term investments, net                                                             |                                                                 |                                                                        | (10,000                                              | )       |         |          | 50,000   |         |         |          | (55,000  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of property, plant and
    equipment                                          |                                                                 |                                                                        | (37,044                                              | )       |         |          | (89,947  | )       |         |          | (70,326  | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from dispositions of
    property, plant and equipment                         |                                                                 |                                                                        | 6,179                                                |         |         |          | 22,942   |         |         |          | 6,956    |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Acquisition of business                                                                 |                                                                 |                                                                        | (10,578                                              | )       |         |          |         |         |         |          |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Investment in joint venture                                                             |                                                                 |                                                                        | (3,620                                               | )       |         |          |         |         |         |          |         |        
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         |                                                                 |                                                                        | Net cash used in investing
    activities            |         |         | (55,063  | )        |         |         | (17,005  | )        |         |          | (118,370 | )
|                                                      |                                                                                         |                                                                
|Financing Activities:                                 |                                                                                         |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Repayment of debt                                                                       |                                                                 |                                                                        |                                                     |         |         |          | (300,000 | )       |         |          |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Excess tax benefits from
    share-based compensation                                   |                                                                 |                                                                        | 9,863                                                |         |         |          |         |         |         |          |         |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from the issuance of stock                                                     |                                                                 |                                                                        | 68,214                                               |         |         |          | 69,375   |         |         |          | 114,276  |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Dividends paid                                                                          |                                                                 |                                                                        | (367,499                                             | )       |         |          | (361,208 | )       |         |          | (344,128 | )      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Stock repurchased                                                                       |                                                                 |                                                                        | (200,003                                             | )       |         |          | (200,038 | )       |         |          | (200,031 | )      
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         |                                                                 |                                                                        | Net cash used in financing
    activities            |         |         | (489,425 | )        |         |         | (791,871 | )        |         |          | (429,883 | )
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         |                                                                 |                                                                        | Increase (decrease) in cash and
    cash equivalents |         |         | 52,368   |          |         |         | (248,177 | )        |         |          | 17,162   |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         |                                                                 |                                                                        | Cash and cash equivalents at
    beginning of year   |         |         | 202,025  |          |         |         | 450,202  |          |         |          | 433,040  |  
|                                                      |                                                                                         |                                                                
|                                                      |                                                                                         |                                                                 |                                                                        | Cash and cash equivalents at end
    of the period   |         | $       | 254,393  |          |         | $       | 202,025  |          |         | $        | 450,202  |  
|                                                      |                                                                                         |                                                                
|Supplemental disclosure of cash
    flow information: |                                                                                         |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid during the period for:                                                        |                                                                 |                                                                        |                                                      |         |         |          |          |         |         |          |          |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Income taxes                                                    |                                                                        | $                                                    | 283,618 |         |          | $        | 314,735 |         |          | $        | 175,972 |         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                         | Interest                                                        |                                                                        | $                                                    | 57,151  |         |          | $        | 70,351  |         |          | $        | 83,551  |         

The accompanying notes are integral to the Consolidated
Financial Statements.




55







---



##### Table of Contents

UST INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY

(Dollars in thousands, except per share amounts)

|                                                                                                                                                                                                    |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------ | ------- | ---------- |  | -------- | --------- | ------------- |  | -------- | -------- | ------------- |  | ------------- | ------- | ------ | - | - | ---------- | - |  | - | -------- | ------ | - | - | ------- | ------ | -
|                                                                                                                                                                                                    |                                                        |        |         |            |  |          |           | Accumulated   |  |          |          | Total         |  |              
|                                                                                                                                                                                                    |                                                        |        |         | Additional |  |          |           | Other         |  |          |          | Stockholders |  |              
|                                                                                                                                                                                                    |                                                        | Common |         | Paid-In    |  | Retained |           | Comprehensive |  | Treasury |          | (Deficit)     |  | Comprehensive
|                                                                                                                                                                                                    |                                                        | Stock  |         | Capital    |  | Earnings |           | Loss          |  | Stock    |          | Equity        |  | Income       
|                                                                                                                                                                                                    |                                                        |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|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   |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Comprehensive income:                                                                                                                                                                               |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Net earnings                                                                                                                                                                                        |                                                        |        |        |            |  |          |          |               |  |          | 505,856  |               |  |               |        |        |   |   |           |   |  |   | 505,856  |        |   | $ | 505,856 |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Other comprehensive income (loss),
    net of tax:                                                                                                                                                  |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Net deferred loss on cash flow
    hedges              |        |         |           |  |          |           |              |  |          |          |              |  |               |         | (1,417 | ) |   |            |  |  |   |          | (1,417 | ) |   |         | (1,417 | )
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Foreign currency translation
    adjustment            |        |         |           |  |          |           |              |  |          |          |              |  |               |         | 639    |   |   |            |  |  |   |          | 639    |   |   |         | 639    |  
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Minimum pension liability adjustment                   |        |         |           |  |          |           |              |  |          |          |              |  |               |         | 924    |   |   |            |  |  |   |          | 924    |   |   |         | 924    |  
|                                                                                                                                                                                                    |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|Other comprehensive income                                                                                                                                                                          |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   | 146     |       
|                                                                                                                                                                                                    |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|Comprehensive income                                                                                                                                                                                |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   | $ | 506,002 |       
|                                                                                                                                                                                                    |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|Adjustment to initially apply
    SFAS No. 158, net of tax                                                                                                                                          |                                                        |        |        |            |  |          |          |               |  |          |         |               |  |               | (39,215 | )      |   |   |           |   |  |   | (39,215  | )      |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Cash dividends 
    $2.28 per share                                                                                                                                                                |                                                        |        |        |            |  |          |          |               |  |          | (367,499 | )             |  |               |        |        |   |   |           |   |  |   | (367,499 | )      |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Dividend equivalents on share-based
    awards                                                                                                                                                      |                                                        |        |        |            |  |          |          |               |  |          | (474     | )             |  |               |        |        |   |   |           |   |  |   | (474     | )      |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Exercise of stock
    options  2,112,200 shares                                                                                                                                                    |                                                        |        | 1,056   |            |  |          | 65,670    |               |  |          |         |               |  |               |        |        |   |   |           |   |  |   | 66,726   |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Share-based compensation, net of
    forfeitures:                                                                                                                                                   |                                                        |        |         |            |  |          |           |               |  |          |          |               |  |               |         |        |   |   |            |   |  |   |          |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Stock and restricted stock
    awards  158,549 shares |        |         | 79         |  |          |           | 7,465         |  |          |          |              |  |               |         |       |   |   |            |  |  |   |          | 7,544  |   |   |         |        |  
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Stock options                                          |        |         |           |  |          |           | 185           |  |          |          |              |  |               |         |       |   |   |            |  |  |   |          | 185    |   |   |         |        |  
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                    | Restricted stock units                                 |        |         |           |  |          |           | 2,869         |  |          |          |              |  |               |         |       |   |   |            |  |  |   |          | 2,869  |   |   |         |        |  
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Issuance of stock upon conversion
    of restricted stock units  21,322 shares                                                                                                                     |                                                        |        | 11      |            |  |          | (1,039    | )             |  |          |         |               |  |               |        |        |   |   |           |   |  |   | (1,028   | )      |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Income tax benefits and decrease in
    receivables from exercise of stock options                                                                                                                  |                                                        |        |        |            |  |          | 15,621    |               |  |          |         |               |  |               |        |        |   |   |           |   |  |   | 15,621   |        |   |   |         |       
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|                                                                                                                                                                                                   
|Stock repurchased 
    4,270,295 shares                                                                                                                                                            |                                                        |        |        |            |  |          |          |               |  |          |         |               |  |               |        |        |   |   | (200,003   | ) |  |   | (200,003 | )      |   |   |         |       
|                                                                                                                                                                                                    |                                                        |        |         |            |  |         
|Balance at December 31, 2006                                                                                                                                                                        |                                                        | $      | 104,956 |            |  | $        | 1,036,237 |               |  | $        | 635,272  |               |  | $             | (56,871 | )      |   | $ | (1,653,768 | ) |  | $ | 65,826   |        |   |   |         |       
|                                                                                                                                                                                                    |                                                        |        |         |            |  |         

The accompanying notes are integral to the Consolidated
Financial Statements.




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10K


UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

UST Inc. (the Company), is a holding company for its
wholly-owned subsidiaries: U.S. Smokeless Tobacco Company
and International Wine & Spirits Ltd.
U.S. Smokeless Tobacco Company is a leading manufacturer
and marketer of moist smokeless tobacco products and
International Wine & Spirits Ltd., through its Ste.
Michelle Wine Estates subsidiary, produces and markets premium
wines sold nationally. The Company conducts its business
principally in the United States.

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 2006 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 Note 9, Borrowing Arrangements).

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 related
to this operation are presented as Discontinued Operations (see
Note 19, Discontinued Operations).

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.



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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Short-Term Investments

Short-term investments at December 31, 2006 and 2005 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.

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 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.
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)
No. 34, Capitalization of Interest Costs.

Impairment of Long-Lived Assets

In accordance with SFAS 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. See Note 4, Assets Held for
Sale, for further information.

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



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10K


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.
Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be
realized.

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, Accounting for
Contingencies, when the Company believes that these
positions are likely to be subject to challenge by a tax
authority.

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

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

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 $71.2 million in 2006,
$66.7 million in 2005 and $75.5 million in 2004. At
December 31, 2006 and 2005, $4.3 million of
advertising-related materials were included in prepaid expenses
and other current assets.

Goodwill and Other Intangible Assets

In accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets,the Company tests
goodwill and other intangible assets with indefinite lives for
impairment on an annual basis (or on an interim basis if an
event occurs that might reduce the fair value of the reporting
unit below its carrying value). The Company conducts testing for
impairment during the fourth quarter of its fiscal year.
Intangible assets that do not have indefinite lives are
amortized based on average lives, which range from
3-20 years.

Share-Based Compensation

On January 1, 2006, the Company adopted the provisions of
SFAS No. 123(R), Share-based Payment,
(SFAS No. 123(R)). The approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123, Accounting for Stock Based
Compensation(SFAS No. 123); however,
SFAS No. 123(R) requires all share-based payments
issued to acquire goods or services, including grants of
employee stock options, to be recognized in the statement of
operations based on their fair values, net of estimated
forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. In the Companys pro forma disclosure required
under SFAS No. 123 for the periods prior to adoption
of SFAS No. 123(R), the Company accounted for
forfeitures as they occurred. Pro forma disclosure, as allowed
under SFAS 123, is no longer an alternative. See
Note 12, Share-Based Compensation, for further
information.

Prior to adoption of SFAS No. 123(R), the Company
accounted for share-based compensation awards to employees and
non-employee directors in accordance with the intrinsic
value-based method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees(APB
Opinion No. 25), as permitted under
SFAS No. 123. Under the intrinsic value-based method,
no share-based compensation expense was reflected



59



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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 value of the underlying common stock on the date of
grant. Compensation expense was recognized in net earnings
during the years ended December 31, 2005 and 2004, as a
result of restricted stock granted to employees and non-employee
directors and restricted stock units granted to employees.

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. See Note 18, Net Earnings Per Share, for
additional information.

Excise Taxes

The Company accounts for excise taxes on a gross basis,
reflecting the amount of excise taxes recognized in both net
sales and costs. Accordingly, amounts reported in net
sales on the Consolidated Statement of Operations for each
year include an amount equal to that reported in the
excise taxes line item.

2  RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements(SFAS No. 157).
SFAS No. 157 provides a common definition of fair
value to be applied to existing GAAP requiring the use of fair
value measures, establishes a framework for measuring fair value
and enhances disclosure about fair value measures under other
accounting pronouncements, but does not change existing guidance
as to whether or not an asset or liability is carried at fair
value. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and, as such, the
Company plans to adopt the provisions of SFAS No. 157
on January 1, 2008. The Company is in the process of
evaluating the impact that the adoption of this pronouncement
will have on its results of operations and financial condition.

In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109, Accounting for Income Taxes(FIN 48), to create a single model to
address accounting for uncertainty in tax positions. FIN 48
clarifies the accounting for income taxes, by prescribing a
minimum threshold that a tax position is required to meet before
being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006, and, as such, the
Company has adopted the provisions of FIN 48 as of



60



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10K


January 1, 2007, as required. The cumulative effect of
adopting FIN 48 will be recorded in retained earnings. The
Company does not expect that the adoption of FIN 48 will
have a significant impact on the Companys financial
position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities  Including an Amendment of FASB Statement
No. 115(SFAS No. 159). SFAS
No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is in the process of
evaluating the impact this pronouncement may have on its results
of operations and financial condition.

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.

3  INVENTORIES

Inventories at December 31, 2006 and 2005 were as follows:

|                             |  |             |         |      |  |   |         | 
|---------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                             |  | December 31
|                             |  |            
|                             |  | 2006        |         | 2005
|                             |  |            
|Leaf tobacco                 |  | $           | 201,035 |      |  | $ | 202,553 | 
|                            
|                            
|                            
|                            
|Products in process          |  |             | 233,741 |      |  |   | 203,396 | 
|                            
|                            
|                            
|                            
|Finished goods               |  |             | 145,820 |      |  |   | 156,343 | 
|                            
|                            
|                            
|                            
|Other materials and supplies |  |             | 20,662  |      |  |   | 21,115  | 
|                             |  |            
|                             |  | $           | 601,258 |      |  | $ | 583,407 | 
|                             |  |            











61







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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

On March 30, 2006, the Company sold a winery property
located in California with a carrying value of $3.4 million
for net proceeds of $5.9 million, resulting in a pre-tax
gain of $2.5 million which was recorded as a reduction to
selling, advertising and administrative (SA&A)
expenses in the Consolidated Statement of Operations. Prior to
this transaction, the carrying value of the property was
included as assets held for sale on the
December 31, 2005 Consolidated Statement of Financial
Position.

5  PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment are reported at cost less
accumulated depreciation. Property, plant and equipment at
December 31, 2006 and 2005 are as follows:

|                                    |  |              |         |             |  |      |         |  |  |   |         | 
|----------------------------------- |  | ------------ | ------- | ----------- |  | ---- | ------- |  |  | - | ------- | 
|                                    |  |              |         | December 31
|                                    |  |              |         |            
|                                    |  |              |         | 2006        |  | 2005
|                                    |  | Lives(Years) |         |            
|                                    |  |              |         |            
|Land                                |  |              | -       |             |  | $    | 15,100  |  |  | $ | 18,417  | 
|                                   
|                                   
|                                   
|                                   
|Buildings and building improvements |  |              | 1 - 40* |             |  |      | 195,522 |  |  |   | 242,025 | 
|                                   
|                                   
|                                   
|                                   
|Vineyards                           |  |              | 25      |             |  |      | 23,739  |  |  |   | 23,614  | 
|                                   
|                                   
|                                   
|                                   
|Machinery and equipment             |  |              | 3 - 20  |             |  |      | 531,525 |  |  |   | 525,242 | 
|                                    |  |              |         |             |  |     
|                                    |  |              |         |             |  |      | 765,886 |  |  |   | 809,298 | 
|                                   
|                                   
|                                   
|                                   
|Less accumulated depreciation       |  |              |         |             |  |      | 376,076 |  |  |   | 378,130 | 
|                                    |  |              |         |             |  |     
|                                    |  |              |         |             |  | $    | 389,810 |  |  | $ | 431,168 | 
|                                    |  |              |         |             |  |     



|  |                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The life of buildings is generally between 10 and 40 years,
    whereas the life of building improvements is generally between
    one and seven years.





Purchase Agreements








|                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                  |  |     
|                  |  | 2007 |        | 2008 |  | 2009 |        | 2010 |  | 2011 |        | Thereafter |  | Total
|                  |  |     
|                 
|                 
|                 
|                 
|Grape commitments |  | $    | 66,805 |      |  | $    | 65,605 |      |  | $    | 65,776 |            |  | $     | 63,193 |  |  | $ | 59,047 |  |  | $ | 125,011 |  |  | $ | 445,437 | 





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##### Table of Contents

10K


Operating Leases

The Company leases certain property and equipment under various
operating lease arrangements. Certain leases contain escalation
clauses as well as renewal options, whereby the Company can
extend the lease term for periods ranging up to five years. The
following is a schedule of future minimum lease payments for
operating leases as of December 31, 2006:

|                  |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |        |  |  |   |         | 
|----------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ |  |  | - | ------- | 
|                  |  |     
|                  |  | 2007 |       | 2008 |  | 2009 |       | 2010 |  | 2011 |       | Thereafter |  | Total
|                  |  |     
|                 
|                 
|                 
|                 
|Lease commitments |  | $    | 7,789 |      |  | $    | 8,772 |      |  | $    | 8,161 |            |  | $     | 6,420 |  |  | $ | 5,049 |  |  | $ | 66,620 |  |  | $ | 102,811 | 







|                       |  |             |        |      |  |   |        | 
|---------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                       |  | December 31
|                       |  |            
|                       |  | 2006        |        | 2005
|                       |  |            
|Prepaid pension costs  |  | $           | 1,138  |      |  | $ | 32,422 | 
|                      
|                      
|                      
|                      
|Capitalized debt costs |  |             | 3,332  |      |  |   | 4,343  | 
|                      
|                      
|                      
|                      
|Goodwill               |  |             | 6,547  |      |  |   | 2,649  | 
|                      
|                      
|                      
|                      
|Other                  |  |             | 15,172 |      |  |   | 6,847  | 
|                       |  |            
|                       |  | $           | 26,189 |      |  | $ | 46,261 | 
|                       |  |            

Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)




Goodwill and Other
Intangible Assets






63







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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

approximately $3.9 million, which is included in
Goodwill in the table above, as well as
$3.7 million of other intangible assets, which are included
in Other in the table above.

8  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 2006
and 2005 consisted of the following:

|                                                 |  |             |         |      |  |   |         | 
|------------------------------------------------ |  | ----------- | ------- | ---- |  | - | ------- | 
|                                                 |  | December 31
|                                                 |  |            
|                                                 |  | 2006        |         | 2005
|                                                 |  |            
|Trade accounts payable                           |  | $           | 93,729  |      |  | $ | 78,947  | 
|                                                
|                                                
|                                                
|                                                
|Employee compensation and benefits               |  |             | 73,742  |      |  |   | 61,340  | 
|                                                
|                                                
|                                                
|                                                
|Interest payable on debt                         |  |             | 19,669  |      |  |   | 19,669  | 
|                                                
|                                                
|                                                
|                                                
|Smokeless tobacco
    settlement-related charges |  |             | 20,433  |      |  |   | 17,997  | 
|                                                
|                                                
|                                                
|                                                
|Returned goods accrual                           |  |             | 17,631  |      |  |   | 16,612  | 
|                                                
|                                                
|                                                
|                                                
|Restructuring(1)                                 |  |             | 4,593   |      |  |   |        | 
|                                                
|                                                
|                                                
|                                                
|Other accrued expenses                           |  |             | 38,457  |      |  |   | 36,496  | 
|                                                 |  |            
|                                                 |  | $           | 268,254 |      |  | $ | 231,061 | 
|                                                 |  |            



|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents liability for restructuring charges as of
    December 31, 2006. For additional information see
    Note 20, Restructuring.





|                                           |  |             |         |          |  |          |         |          |  |   |         |  |  |   |         | 
|------------------------------------------ |  | ----------- | ------- | -------- |  | -------- | ------- | -------- |  | - | ------- |  |  | - | ------- | 
|                                           |  | December 31
|                                           |  |            
|                                           |  | 2006        |         | 2005    
|                                           |  | Carrying    |         | Fair     |  | Carrying |         | Fair    
|                                           |  | Value       |         | Value(1) |  | Value    |         | Value(1)
|                                           |  |            
|7.25% Senior notes, due
    June 1, 2009   |  | $           | 240,000 |          |  | $        | 248,400 |          |  | $ | 240,000 |  |  | $ | 248,960 | 
|                                          
|                                          
|                                          
|                                          
|6.625% Senior notes, due
    July 15, 2012 |  |             | 600,000 |          |  |          | 633,000 |          |  |   | 600,000 |  |  |   | 621,480 | 
|                                           |  |            
|                                           |  | $           | 840,000 |          |  | $        | 881,400 |          |  | $ | 840,000 |  |  | $ | 870,440 | 
|                                           |  |            



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







64







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##### Table of Contents

10K


0.15 percent per annum. Commitment fees incurred for the
Credit Facility approximated $0.5 million each year in 2006
and 2005 and $0.2 million in 2004. As of December 31,
2006, the Company was in compliance with all covenants under the
terms of the Credit Facility. During 2004, the Company also
recognized $0.7 million and $0.5 million related to
the amortization of capitalized origination costs and commitment
fees, respectively, in connection with a previous 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, 2006, 2005 and 2004.

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
Note 10, Derivative Instruments and Hedging
Activities).

10  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 fair value of each of these instruments reflects
the net amount required to settle the position. The accounting
for gains and losses associated with changes in the fair value
of derivatives and the related effects on the consolidated
financial statements is subject to their hedge designation and
whether they meet effectiveness standards.

During 2006, the Company entered into a forward starting
interest rate swap to hedge against the variability of
forecasted interest payments attributable to changes in interest
rates through the date of an anticipated debt issuance in 2009.
The forward starting interest rate swap has a notional amount of
$100 million and the terms call for the Company to receive
interest quarterly at a variable rate equal to the London
InterBank Offered Rate (LIBOR) and to pay interest
semi-annually at a fixed rate of 5.715 percent. The Company
expects that the forward starting swap will be perfectly
effective in offsetting the variability in the forecasted
interest rate payments, as, at inception, the critical terms of
the forward starting swap exactly match the critical terms of
the expected debt issuance. In accordance with the provisions of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities(SFAS No. 133),
the Company will use the Hypothetical Derivative Method to
measure hedge effectiveness. The fair value of the forward
starting interest rate swap at December 31, 2006 was a net
liability of $3.1 million, based on a dealer quote, and
considering current market rates, and was included in
other liabilities on the Consolidated Statement of
Financial Position. Accumulated other comprehensive loss at
December 31, 2006 included the accumulated loss on the cash
flow hedge (net of taxes) of $2 million, which reflects the
comprehensive loss recognized for the year ended
December 31, 2006, in connection with the change in fair
value of the swap.



65



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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 Note 9,
Borrowing Arrangements). The fair value of the swap
at December 31, 2006 and 2005 was a net liability of
$1.1 million and $1.9 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, 2006 and 2005 included the accumulated
loss on the cash flow hedge (net of taxes) of $0.7 million
and $1.2 million, respectively. This reflects
$0.5 million and $1.4 million (net of taxes) of other
comprehensive income recognized for the year ended
December 31, 2006 and 2005, respectively, in connection
with the change in fair value of the swap.

During 2006, the Company 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. At December 31, 2006, there were no foreign
currency forward contracts outstanding, as all contracts were
settled during 2006. The amounts recognized upon settlement of
these contracts was not material.

Other derivative contracts at December 31, 2006 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.

11  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.

Common stock issued at December 31, 2006 and 2005 was
209,912,510 shares and 207,620,439 shares,
respectively. Treasury shares held at December 31, 2006 and
2005 were 49,319,673 shares and 45,049,378 shares,
respectively.

The Company repurchased a total of 4.3 million and
4.4 million shares during 2006 and 2005, respectively, at a
cost of approximately $200 million each year. Included in
the shares repurchased during 2005 were 64,000 shares that
the Company repurchased at prevailing market prices directly
from the trust established for the Companys qualified
defined benefit pension plans. The shares repurchased during
2006 and a portion of the shares repurchased during 2005 were
made pursuant to the Companys authorized program, approved
in December 2004 by the Companys Board of Directors, to
repurchase up to 20 million shares of its outstanding
common stock. Through December 31, 2006, approximately
7.1 million shares have been repurchased at a cost of
approximately $317 million under this program. Of the total
shares repurchased in 2005, approximately 1.6 million
shares were repurchased pursuant to the Companys previous
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 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



66



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10K


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
Note 12, Share-Based Compensation, for details
on awards made under this plan).

12  SHARE-BASED COMPENSATION

On January 1, 2006, the Company adopted the provisions of
SFAS No. 123(R). The approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123; however, SFAS No. 123(R)
requires all share-based payments issued to acquire goods or
services, including grants of employee stock options, to be
recognized in the statement of operations based on their fair
values, net of estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Companys
pro forma disclosure required under SFAS No. 123 for
the periods prior to adoption of SFAS No. 123(R), the
Company accounted for forfeitures as they occurred. Upon the
adoption of SFAS No. 123(R), pro forma disclosure, as
allowed under SFAS No. 123, was no longer an
alternative. The Company has elected the modified prospective
transition method as permitted by SFAS No. 123(R), in
which compensation cost is recognized beginning with the
effective date, based on the requirements of
SFAS No. 123(R), for all share-based payments granted
after January 1, 2006, and based on the requirements of
SFAS No. 123 for all awards granted to employees prior
to that date that remained unvested upon adoption of
SFAS No. 123(R). Compensation expense related to
share-based awards is recognized over the requisite service
period, which is generally the vesting period. For shares
subject to graded vesting, the Companys policy is to apply
the straight-line method in recognizing compensation expense.
The amount of incremental compensation expense recognized
relating to stock options as a result of the adoption of
SFAS No. 123(R) for the year ended December 31,
2006 was not material.

Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits for deductions resulting from the
exercise of stock options as operating cash flows on its
Consolidated Statement of Cash Flows. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized
compensation expense, or the pro forma compensation expense that
would have been recognized under SFAS No. 123 in the
case of stock options granted prior to January 1, 2006, to
be reported as a financing cash inflow, rather than as an
operating cash inflow. This requirement reduces net operating
cash flows and increases net financing cash flows. Total cash
flows do not differ from what would have been reported under
prior accounting guidance.

Prior to the adoption of SFAS No. 123(R), the Company
accounted for share-based compensation awards to employees and
non-employee directors in accordance with the intrinsic
value-based method prescribed by APB Opinion No. 25, as
permitted under Statement No. 123. Under the intrinsic
value-based method, no share-based compensation expense was
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 was recognized in net
earnings during the years ended December 31, 2005 and 2004,
as a result of restricted stock granted to employees and
non-employee directors and restricted stock units granted to
employees.





67



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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

As the Company did not account for share-based compensation
awards under the fair value method prior to January 1,
2006, the following table illustrates the effect of applying the
fair value method on net earnings and net earnings per share for
the years ended December 31, 2005 and 2004 as prescribed in
SFAS No. 123:

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



|                                                    |  |                         |        |      |  |      |       |  |  |   |       | 
|--------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                    |  | Year Ended December 31,
|                                                    |  |                        
|                                                    |  | 2006                    |        | 2005 |  | 2004
|                                                    |  |                        
|Selling, advertising and
    administrative expense |  | $                       | 9,440  |      |  | $    | 5,976 |  |  | $ | 3,289 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Cost of products sold                               |  |                         | 486    |      |  |      |      |  |  |   |      | 
|                                                   
|                                                   
|                                                   
|                                                   
|Restructuring
    charges(1)                        |  |                         | 477    |      |  |      |      |  |  |   |      | 
|                                                    |  |                        
|Total pre-tax share-based
    compensation expense  |  | $                       | 10,403 |      |  | $    | 5,976 |  |  | $ | 3,289 | 
|                                                    |  |                        
|Income tax benefit                                  |  | $                       | 3,774  |      |  | $    | 2,092 |  |  | $ | 1,151 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Capitalized as inventory                            |  | $                       | 115    |      |  | $    |      |  |  | $ |      | 



|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents share-based compensation expense recognized in
    connection with one-time termination benefits provided to
    employees affected by the Companys previously announced
    cost-reduction initiative called Project Momentum.
    See Note 20  Restructuring for
    additional information regarding Project Momentum.





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10K


Forfeitures of share-based awards granted from these inactive
plans are transferred into the 2005 LTIP as they occur, and are
considered available for future issuance under the 2005 LTIP.
Share-based awards are generally in the form of common shares,
stock options, restricted stock or restricted stock units.
Share-based awards granted under the 2005 LTIP vest over a
period determined by the Compensation Committee of the Board of
Directors (Compensation Committee) and in the case
of stock option awards, may be exercised up to a maximum of ten
years from the date of grant. Under the UST Inc. Amended and
Restated Stock Incentive Plan and the UST Inc. 1992 Stock Option
Plan, share-based awards vest, in ratable installments or
otherwise, over a period of one to five years from the date of
grant and, in the case of stock option awards, may be exercised
up to a maximum of ten years from the date of grant using
various payment methods. Under the Nonemployee Directors
Stock Option Plan, options first become exercisable six months
from the date of grant and may be exercised up to a maximum of
ten years from the date of grant. In certain instances, awards
of restricted stock are subject to performance conditions
related to the Companys dividend payout ratio and/or
earnings per share, which impact the number of shares of
restricted stock that will ultimately vest. For restricted stock
awards subject to performance conditions, the
SFAS No. 123(R) grant date is the earliest date at
which all of the following have occurred, (1) the
Compensation Committee has authorized the award, (2) the
Compensation Committee has established the performance goals
that will be used to measure actual performance, and
(3) the Company and the employee have a mutual
understanding of the key terms and conditions of the award. The
Company recognizes compensation expense for awards subject to
performance conditions based on the estimated number of shares
of restricted stock that will ultimately vest, and adjusts this
estimate, as necessary, based on actual performance. Upon the
exercise of stock options or vesting of restricted stock units,
the Company issues new shares of common stock from the shares
reserved for issuance under its equity compensation plans.

Stock Options

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. In order to prevent unintended personal
benefits to the Companys officers, the accelerated vesting
was conditioned on such officers entering into amendments 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 options
would have otherwise vested under the original terms of the
applicable option agreements or separation from service. All
other terms related to these stock options were not affected by
this acceleration. As a result of the acceleration of these
options, the Company is not required to recognize pre-tax
incremental compensation expense in its Consolidated Statements
of Operations associated with these options of approximately
$3 million in 2006 and $0.5 million in 2007.





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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The following table presents a summary of the Companys
stock option activity and related information for the year ended
December 31, 2006 (options in thousands):

|                                     |  |                              |          |                  |  |                  |       |                 |  |  |            |  |  |   |               | 
|------------------------------------ |  | ---------------------------- | -------- | ---------------- |  | ---------------- | ----- | --------------- |  |  | ---------- |  |  | - | ------------- | 
|                                     |  | Year Ended December 31, 2006
|                                     |  |                             
|                                     |  |                              |          | Weighted-        |  | Weighted-Average |       |                
|                                     |  | Number of                    |          | Average Exercise |  | Remaining        |       | Aggregate      
|                                     |  | Options                      |          | Price            |  | Contractual Term |       | Intrinsic Value
|                                     |  |                             
|Outstanding at January 1, 2006       |  |                              | 6,845.6  |                  |  | $                | 32.13 |                 |  |  |            |  |  |   |               | 
|                                    
|                                    
|                                    
|                                    
|Granted                              |  |                              | 200.0    |                  |  | $                | 53.47 |                 |  |  |            |  |  |   |               | 
|                                    
|                                    
|                                    
|                                    
|Exercised                            |  |                              | (2,112.2 | )                |  | $                | 31.53 |                 |  |  |            |  |  |   |               | 
|                                    
|                                    
|                                    
|                                    
|Forfeited                            |  |                              | (5.4     | )                |  | $                | 33.21 |                 |  |  |            |  |  |   |               | 
|                                    
|                                    
|                                    
|                                    
|Expired                              |  |                              | (14.0    | )                |  | $                | 34.01 |                 |  |  |            |  |  |   |               | 
|                                     |  |                              |          |                  |  |                  |       |                 |  |  |            |  |  |   |               | 
|Outstanding at December 31,
    2006 |  |                              | 4,914.0  |                  |  | $                | 33.25 |                 |  |  | 4.93 years |  |  | $ | 123.1 million | 
|                                     |  |                              |          |                  |  |                  |       |                 |  |  |            |  |  |   |               | 
|Exercisable at December 31,
    2006 |  |                              | 4,664.0  |                  |  | $                | 32.33 |                 |  |  | 4.68 years |  |  | $ | 121.1 million | 





|                            |  |      |           |      |  |      |           |  |  |  |           | 
|--------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                            |  |     
|                            |  | 2006 |           | 2005 |  | 2004
|                            |  |     
|Expected dividend yield     |  |      | 4.4%      |      |  |      | 4.9%      |  |  |  | 5.0%      | 
|                           
|                           
|                           
|                           
|Risk-free interest rate     |  |      | 4.6%      |      |  |      | 4.5%      |  |  |  | 3.9%      | 
|                           
|                           
|                           
|                           
|Expected volatility         |  |      | 20.2%     |      |  |      | 24.2%     |  |  |  | 13.2%     | 
|                           
|                           
|                           
|                           
|Expected life of the option |  |      | 6.5 years |      |  |      | 7.3 years |  |  |  | 7.5 years | 



|                                                                   |  |      |        |      |  |      |        |  |  |   |         | 
|------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                                                                   |  |     
|                                                                   |  | 2006 |        | 2005 |  | 2004
|                                                                   |  |     
|Weighted-average grant date fair
    value per option              |  | $    | 8.35   |      |  | $    | 6.86   |  |  | $ | 2.76    | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Total intrinsic value of options
    exercised                     |  | $    | 38,239 |      |  | $    | 43,234 |  |  | $ | 39,811  | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Tax benefit realized for deduction
    from stock option exercises |  | $    | 14,215 |      |  | $    | 15,860 |  |  | $ | 17,070  | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cash received from option exercises                                |  | $    | 68,214 |      |  | $    | 69,375 |  |  | $ | 114,276 | 



70







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##### Table of Contents

10K


Receivables from the exercise of stock options in the amount of
$6.9 million in 2006, $8.3 million in 2005 and
$11.9 million in 2004 have been deducted from
stockholders equity.

Restricted Stock/ Restricted Stock Units/ Common
Stock

A summary of the status of restricted stock and restricted stock
units as of December 31, 2006, and changes during the year
ended December 31, 2006, is presented below:

|                               |  |                  |         |                        |  |           |       |                  |  |  |         |   |  |   |       | 
|------------------------------ |  | ---------------- | ------- | ---------------------- |  | --------- | ----- | ---------------- |  |  | ------- | - |  | - | ----- | 
|                               |  | Restricted Stock |         | Restricted Stock Units
|                               |  |                  |         |                       
|                               |  |                  |         | Weighted-Average       |  |           |       | Weighted-Average
|                               |  | Number of        |         | Grant-Date Fair        |  | Number of |       | Grant-Date Fair 
|                               |  | Shares           |         | Value per Share        |  | Shares    |       | Value per Share 
|                               |  |                  |         |                       
|Nonvested at January 1, 2006   |  |                  | 442,190 |                        |  | $         | 39.66 |                  |  |  | 171,390 |   |  | $ | 38.68 | 
|                              
|                              
|                              
|                              
|Granted                        |  |                  | 55,000  |                        |  | $         | 50.14 |                  |  |  | 109,930 |   |  | $ | 44.58 | 
|                              
|                              
|                              
|                              
|Forfeited                      |  |                  | (7,018  | )                      |  | $         | 39.92 |                  |  |  | (18,678 | ) |  | $ | 40.77 | 
|                              
|                              
|                              
|                              
|Vested                         |  |                  | (29,734 | )                      |  | $         | 35.64 |                  |  |  | (32,167 | ) |  | $ | 39.39 | 
|                               |  |                  |         |                        |  |           |       |                  |  |  |         |   |  |   |       | 
|Nonvested at December 31, 2006 |  |                  | 460,438 |                        |  | $         | 41.17 |                  |  |  | 230,475 |   |  | $ | 41.23 | 
|                               |  |                  |         |                        |  |           |       |                  |  |  |         |   |  |   |       | 
















71







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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

net of tax. See Note 14, Employee Benefit and
Compensation Plans, for additional information regarding
amounts recognized in accumulated other comprehensive loss upon
adoption of SFAS No. 158.

|                             |                                        |             |        |            |  |                 |         |               |   |               |         |         |   |   |        |        |   |   |         |         |  
|---------------------------- | -------------------------------------- | ----------- | ------ | ---------- |  | --------------- | ------- | ------------- | - | ------------- | ------- | ------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                             |                                        |             |        |            |  |                 |         |               |   | Total        
|                             |                                        | Foreign     |        | Minimum    |  |                 |         | Fair Value of |   | Accumulated  
|                             |                                        | Currency    |        | Pension    |  | Adjustment to   |         | Derivative    |   | Other        
|                             |                                        | Translation |        | Liability  |  | Initially Apply |         | Instruments   |   | Comprehensive
|                             |                                        | Adjustment  |        | Adjustment |  | SFAS No. 158    |         | Adjustment    |   | (Loss) Income
|                             |                                        |             |        |            |  |                 |         |               |   |              
|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 | )      
|                            
|                            
|                            
|                            
|                             | Net change for the year                |             |        | 639        |  |                 |         | 924           |   |               |         |        |   |   |        | (1,417 | ) |   |         | 146     |  
|                            
|                            
|                            
|                            
|                             | Impact of adoption of
    SFAS No. 158 |             |        |           |  |                 |         | 15,506        |   |               |         | (54,721 | ) |   |        |       |   |   |         | (39,215 | )
|                             |                                        |            
|Balance at December 31, 2006 |                                        | $           | 750    |            |  | $               |        |               |   | $             | (54,721 | )       |   | $ | (2,900 | )      |   | $ | (56,871 | )      
|                             |                                        |            



|                                                    |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                    |  |     
|                                                    |  | 2006 |        | 2005 |  | 2004
|                                                    |  |     
|Foreign currency translation
    adjustment         |  | $    | (344   | )    |  | $    | (625   | ) |  | $ | (943   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Minimum pension liability adjustment                |  |      | (498   | )    |  |      | 244    |   |  |   | (516   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Adjustment to initially apply
    SFAS No. 158      |  |      | 21,116 |      |  |      |       |   |  |   |       |  
|                                                   
|                                                   
|                                                   
|                                                   
|Fair value of derivative
    instruments adjustment |  |      | 763    |      |  |      | (754   | ) |  |   | (451   | )
|                                                    |  |     
|                                                    |  | $    | 21,037 |      |  | $    | (1,135 | ) |  | $ | (1,910 | )
|                                                    |  |     









72







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##### Table of Contents

10K


On December 31, 2006, the Company adopted the provisions of
SFAS No. 158, which requires companies to recognize
the funded status of defined benefit pension and other
postretirement benefit plans (measured as the difference between
the fair value of plan assets and the benefit obligation) as an
asset or liability in its statement of financial position, with
a corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated other
comprehensive income at adoption represents the net unrecognized
actuarial losses, unrecognized prior service costs and
unrecognized transition asset remaining from the initial
adoption of SFAS No. 87, Employers Accounting
for Pensions(SFAS No. 87), and
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions
(SFAS No. 106), for the Companys
defined benefit pension and other postretirement benefit plans,
respectively. These amounts will be subsequently recognized as
net periodic benefit cost pursuant to the Companys
historical method for amortizing such amounts. Actuarial gains
and losses that arise in subsequent periods and are not
recognized as net periodic benefit cost in the same periods will
be recognized as a component of other comprehensive income and
will be subsequently recognized as a component of net periodic
benefit cost on the same basis as the amounts recognized in
accumulated other comprehensive income upon adoption of
SFAS No. 158.

The incremental effects of adopting the provisions of
SFAS No. 158 on the Companys consolidated
statement of financial position at December 31, 2006 are
presented in the tables below. The adoption of
SFAS No. 158 had no effect on the Companys
consolidated statement of operations.

Effects of Adopting SFAS No. 158:

Pensions

|                                                       |  |                   |          |                    |  |             |         |   |  |   |          |  
|------------------------------------------------------ |  | ----------------- | -------- | ------------------ |  | ----------- | ------- | - |  | - | -------- | -
|                                                       |  | December 31, 2006
|                                                       |  |                  
|                                                       |  | Prior to Adopting |          | Effect of Adopting |  |            
|                                                       |  | SFAS No. 158(1)   |          | SFAS No. 158       |  | As Reported
|                                                       |  |                  
|Prepaid pension costs                                  |  | $                 | 11,781   |                    |  | $           | (10,643 | ) |  | $ | 1,138    |  
|                                                      
|                                                      
|                                                      
|                                                      
|Intangible asset                                       |  |                   | 750      |                    |  |             | (750    | ) |  |   |         |  
|                                                      
|                                                      
|                                                      
|                                                      
|Accrued pension cost                                   |  |                   | (102,806 | )                  |  |             | (46,638 | ) |  |   | (149,444 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes                                  |  |                   | 8,349    |                    |  |             | 20,311  |   |  |   | 28,660   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive
    loss, after taxes  |  |                   | 15,506   |                    |  |             | 37,720  |   |  |   | 53,226   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive
    loss, before taxes |  |                   | 23,855   |                    |  |             | 58,031  |   |  |   | 81,886   |  



|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | Represents amounts that would have been recognized under the
    provisions of SFAS No. 87.

Other Postretirement Benefits


|                                                       |  |                   |         |                    |  |             |        |   |  |   |         |  
|------------------------------------------------------ |  | ----------------- | ------- | ------------------ |  | ----------- | ------ | - |  | - | ------- | -
|                                                       |  | December 31, 2006
|                                                       |  |                  
|                                                       |  | Prior to Adopting |         | Effect of Adopting |  |            
|                                                       |  | SFAS No. 158(2)   |         | SFAS No. 158       |  | As Reported
|                                                       |  |                  
|Accrued benefit cost                                   |  | $                 | (90,290 | )                  |  | $           | (2,300 | ) |  | $ | (92,590 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes                                  |  |                   |        |                    |  |             | 805    |   |  |   | 805     |  
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive
    loss, after taxes  |  |                   |        |                    |  |             | 1,495  |   |  |   | 1,495   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive
    loss, before taxes |  |                   |        |                    |  |             | 2,300  |   |  |   | 2,300   |  



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(2) | Represents amounts that would have been recognized under the
    provisions of SFAS No. 106.



73







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##### Table of Contents

UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

The Company uses a December 31 measurement date for all of
its plans. The following table represents a reconciliation of
the plans at December 31, 2006 and 2005, respectively:

|                                                                           |                                                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- | -------------------------------------------------- | ------------- | - | -------------- | - | ---- | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                           |                                                    |              
|                                                                           |                                                    |               |   | Postretirement
|                                                                           |                                                    |               |   | Benefits Other
|                                                                           |                                                    | Pension Plans |   | than Pensions 
|                                                                           |                                                    |              
|                                                                           |                                                    | 2006          |   | 2005           |   | 2006 |   | 2005    
|                                                                           |                                                    |              
|Change in Benefit
    Obligation                                           |                                                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefit obligation at beginning of
    year        |               | $ | 534,704        |   |      | $ | 493,334  |   |  | $ | 84,984  |   |  | $ | 92,631  |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Service cost                                       |               |   | 18,940         |   |      |   | 18,332   |   |  |   | 5,346   |   |  |   | 5,659   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Interest cost                                      |               |   | 30,436         |   |      |   | 28,744   |   |  |   | 4,928   |   |  |   | 5,340   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Plan participants
    contributions               |               |   |               |   |      |   |         |   |  |   | 393     |   |  |   | 353     |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Plan amendments                                    |               |   | 202            |   |      |   | 340      |   |  |   | (774    | ) |  |   | (20,800 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Plan curtailment                                   |               |   | (4,607         | ) |      |   |         |   |  |   | 2,290   |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Actuarial (gain) loss                              |               |   | (6,008         | ) |      |   | 14,863   |   |  |   | (2,216  | ) |  |   | 7,176   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Special termination benefits                       |               |   | 4,035          |   |      |   |         |   |  |   | 2,576   |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefits paid                                      |               |   | (22,559        | ) |      |   | (20,909  | ) |  |   | (4,937  | ) |  |   | (5,375  | )
|                                                                           |                                                    |              
|                                                                           | Benefit obligation at end of
    year              |               | $ | 555,143        |   |      | $ | 534,704  |   |  | $ | 92,590  |   |  | $ | 84,984  |  
|                                                                           |                                                    |              
|Change in Plan Assets                                                      |                                                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Fair value of plan assets at
    beginning of year |               | $ | 370,036        |   |      | $ | 355,891  |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Actual return on plan assets                       |               |   | 54,020         |   |      |   | 18,886   |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Employer contributions                             |               |   | 6,343          |   |      |   | 17,371   |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefits paid                                      |               |   | (22,559        | ) |      |   | (20,909  | ) |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Administrative expenses                            |               |   | (1,003         | ) |      |   | (1,203   | ) |  |   |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Fair value of plan assets at end
    of year       |               | $ | 406,837        |   |      | $ | 370,036  |   |  |   |        |   |  |   |        |  
|                                                                           |                                                    |              
|Funded Status                                                              |                                                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Funded status at end of year                       |               | $ | (148,306       | ) |      | $ | (164,668 | ) |  | $ | (92,590 | ) |  | $ | (84,984 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized actuarial loss                        |               |   | 81,682         |   |      |   | 125,565  |   |  |   |        |   |  |   | 23,737  |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized prior service cost
    (credit)       |               |   | 213            |   |      |   | 36       |   |  |   |        |   |  |   | (24,572 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized transition asset                      |               |   | (9             | ) |      |   | (17      | ) |  |   |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Accrued benefit cost                               |               | $ | (66,420        | ) |      | $ | (39,084  | ) |  | $ | (92,590 | ) |  | $ | (85,819 | )
|                                                                           |                                                    |              
|Amounts Recognized in the
    Consolidated Statement of Financial Position |                                                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Before Adoption of
    SFAS 158                    |               |   |                |   |      |   |          |   |  |   |         |   |  |   |         |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Prepaid benefit cost                               |               |   |               |   |      | $ | 32,422   |   |  |   |        |   |  | $ |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accrued benefit liability                          |               |   |               |   |      |   | (97,902  | ) |  |   |        |   |  |   | (85,819 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Intangible asset                                   |               |   |               |   |      |   | 1,118    |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accumulated other comprehensive loss               |               |   |               |   |      |   | 25,278   |   |  |   |        |   |  |   |        |  
|                                                                           |                                                    |              
|                                                                           | Net amount recognized                              |               |   |               |   |      | $ | (39,084  | ) |  |   |        |   |  | $ | (85,819 | )
|                                                                           |                                                    |              



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|                                                               |                                |               |   |                |   |      |  |      |  |  |   |         |   |  |  |   | 
|-------------------------------------------------------------- | ------------------------------ | ------------- | - | -------------- | - | ---- |  | ---- |  |  | - | ------- | - |  |  | - | 
|                                                               |                                |              
|                                                               |                                |               |   | Postretirement
|                                                               |                                |               |   | Benefits Other
|                                                               |                                | Pension Plans |   | than Pensions 
|                                                               |                                |              
|                                                               |                                | 2006          |   | 2005           |   | 2006 |  | 2005
|                                                               |                                |              
|                                                               | After Adoption of
    SFAS 158 |               |   |                |   |      |  |      |  |  |   |         |   |  |  |   | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Noncurrent assets              |               | $ | 1,138          |   |      |  |     |  |  | $ |        |   |  |  |  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Current liabilities            |               |   | (7,020         | ) |      |  |     |  |  |   | (6,177  | ) |  |  |  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Noncurrent liabilities         |               |   | (142,424       | ) |      |  |     |  |  |   | (86,413 | ) |  |  |  | 
|                                                               |                                |              
|                                                               | Net amount recognized          |               | $ | (148,306       | ) |      |  |     |  |  | $ | (92,590 | ) |  |  |  | 
|                                                               |                                |              
|Amounts Recognized in
    Accumulated Other Comprehensive Loss |                                |               |   |                |   |      |  |      |  |  |   |         |   |  |  |  
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Net actuarial loss             |               | $ | 81,682         |   |      |  |     |  |  | $ | 20,113  |   |  |  |  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Prior service cost (credit)    |               |   | 213            |   |      |  |     |  |  |   | (17,813 | ) |  |  |  | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Unrecognized transition asset  |               |   | (9             | ) |      |  |     |  |  |   |        |   |  |  |  | 
|                                                               |                                |              
|                                                               | Total, before taxes            |               | $ | 81,886         |   |      |  |     |  |  |   | 2,300   |   |  |  |  | 
|                                                               |                                |              



Assumptions


|                                                                                 |  |               |      |                |  |      |      |      |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | ------------- | ---- | -------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                                                 |  |              
|                                                                                 |  |               |      | Postretirement
|                                                                                 |  |               |      | Benefits Other
|                                                                                 |  | Pension Plans |      | than Pensions 
|                                                                                 |  |              
|                                                                                 |  | 2006          |      | 2005           |  | 2006 |      | 2005
|                                                                                 |  |              
|The weighted-average assumptions
    used to determine benefit obligations       |  |               |      |                |  |      |      |      |  |  |      |   |  |  |      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Discount rate                                                                    |  |               | 6.00 | %              |  |      | 5.75 | %    |  |  | 6.00 | % |  |  | 5.75 | %
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Rate of compensation increase                                                    |  |               | 4.80 | %              |  |      | 4.80 | %    |  |  |     |   |  |  |     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|The weighted-average assumptions
    used to determine net periodic benefit cost |  |               |      |                |  |      |      |      |  |  |      |   |  |  |      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Discount rate                                                                    |  |               | 5.75 | %              |  |      | 6.00 | %    |  |  | 5.75 | % |  |  | 6.00 | %
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Expected return on plan assets                                                   |  |               | 7.50 | %              |  |      | 7.50 | %    |  |  |     |   |  |  |     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Rate of compensation increase                                                    |  |               | 4.80 | %              |  |      | 4.80 | %    |  |  |     |   |  |  |     |  








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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Net periodic benefit cost for the years ended December 31,
2006, 2005 and 2004, respectively, includes the following
components:

|                                                  |                           |               |         |                         |  |      |         |        |  |      |         |        |  |   |        |       |  |   |        |       |  |   |        |       | 
|------------------------------------------------- | ------------------------- | ------------- | ------- | ----------------------- |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                  |                           |              
|                                                  |                           |               |         | Postretirement Benefits
|                                                  |                           | Pension Plans |         | Other than Pensions    
|                                                  |                           |              
|                                                  |                           | 2006          |         | 2005                    |  | 2004 |         | 2006   |  | 2005 |         | 2004  
|                                                  |                           |              
|Service cost                                      |                           | $             | 18,940  |                         |  | $    | 18,332  |        |  | $    | 16,688  |        |  | $ | 5,346  |       |  | $ | 5,659  |       |  | $ | 4,734  |      
|                                                 
|                                                 
|                                                 
|                                                 
|Interest cost                                     |                           |               | 30,436  |                         |  |      | 28,744  |        |  |      | 27,493  |        |  |   | 4,928  |       |  |   | 5,340  |       |  |   | 4,854  |      
|                                                 
|                                                 
|                                                 
|                                                 
|Expected return on plan assets                    |                           |               | (26,136 | )                       |  |      | (25,100 | )      |  |      | (23,282 | )      |  |   |       |       |  |   |       |       |  |   |       |      
|                                                 
|                                                 
|                                                 
|                                                 
|Amortization of unrecognized
    transition asset |                           |               | (8      | )                       |  |      | (8      | )      |  |      | (8      | )      |  |   |       |       |  |   |       |       |  |   |       |      
|                                                 
|                                                 
|                                                 
|                                                 
|Amortization of prior service cost
    (credit)   |                           |               | 18      |                         |  |      | (1      | )      |  |      | (43     | )      |  |   | (5,456 | )     |  |   | (3,153 | )     |  |   | (4,374 | )    
|                                                 
|                                                 
|                                                 
|                                                 
|Recognized actuarial loss                         |                           |               | 6,388   |                         |  |      | 5,620   |        |  |      | 6,935   |        |  |   | 1,406  |       |  |   | 1,120  |       |  |   | 339    |      
|                                                 
|                                                 
|                                                 
|                                                 
|Curtailment and special termination
    benefits  |                           |               | 4,042   |                         |  |      |        |        |  |      |        |        |  |   | 2,789  |       |  |   |       |       |  |   |       |      
|                                                  |                           |              
|                                                  | Net periodic benefit cost |               | $       | 33,680                  |  |      | $       | 27,587 |  |      | $       | 27,783 |  |   | $      | 9,013 |  |   | $      | 8,966 |  |   | $      | 5,553 | 
|                                                  |                           |              







|                               |  |               |         |             |  |               |         |             |  |   |         |  |  |   |         | 
|------------------------------ |  | ------------- | ------- | ----------- |  | ------------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                               |  | 2006          |         | 2005       
|                               |  |               |         |            
|                               |  |               |         | 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 |  | $             | 295,068 |             |  | $             | 192,427 |             |  | $ | 277,098 |  |  | $ | 180,823 | 
|                              
|                              
|                              
|                              
|Projected benefit obligation   |  |               | 352,618 |             |  |               | 202,525 |             |  |   | 338,183 |  |  |   | 196,521 | 
|                              
|                              
|                              
|                              
|Fair value of plan assets      |  |               | 316,709 |             |  |               | 90,128  |             |  |   | 286,751 |  |  |   | 83,285  | 





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additional benefits for certain employees, accounted for
$98.3 million and $106.7 million of the ABO and PBO,
respectively, at December 31, 2006.

The assumed health care cost trend rates have a significant
effect on the amounts reported for the welfare benefit plans. To
illustrate, a one-percentage point increase in the assumed
health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 2006
by approximately $12.4 million and increase the service and
interest cost components of expense by approximately
$1.8 million. A one-percentage point decrease in the
assumed health care cost trend rate would have decreased the
accumulated postretirement benefit obligation at
December 31, 2006 by approximately $10.9 million and
decreased the service and interest components of expense by
approximately $1.5 million.

Plan assets of the Companys pension plans include
marketable equity securities, which had included common stock of
the Company, as well as corporate and government debt
securities. At December 31, 2006, the fund did not hold any
shares of the Companys common stock, as the fund sold its
remaining 0.4 million shares in August 2006. At
December 31, 2005, the fund held 0.4 million shares of
the Companys common stock having a market value of
$16.1 million. Although there were no repurchases made from
the trust during 2006, in 2005, the Company repurchased
64,000 shares at prevailing market prices directly from the
trust established for the Companys defined benefit pension
plans. These repurchases were made in connection with the
Companys objective to diversify the investments held by
the trust. Dividends paid on shares held by the fund were
$0.5 million and $0.9 million in 2006 and 2005,
respectively.

Weighted-Average Asset Allocations by Asset
Category

|                  |  |           |        |                    |  |      |  |     
|----------------- |  | --------- | ------ | ------------------ |  | ---- |  | ----
|                  |  |           |        | Pension Plans    
|                  |  |           |        | Allocation of Plan
|                  |  |           |        | Assets at         
|                  |  |           |        | December 31       
|                  |  |           |        |                   
|                  |  | Target    |        | 2006               |  | 2005
|AssetCategory     |  | Alloction |        |                   
|                  |  |           |        |                   
|Equity securities |  |           | 55-70% |                    |  | 68%  |  | 73% 
|                 
|                 
|                 
|                 
|Debt securities   |  |           | 25-40% |                    |  | 32%  |  | 27% 
|                 
|                 
|                 
|                 
|Other             |  |           | 0-5%   |                    |  | 0%   |  | 0%  
|                  |  |           |        |                    |  |     
|                  |  |           |        |                    |  | 100% |  | 100%
|                  |  |           |        |                    |  |     









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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

appropriateness of other asset classes for the Plan and could
decide to make a limited investment in other asset classes in
the future. At the end of the year, Plan assets were invested
32 percent in fixed income securities and 68 percent
in equity securities.

Cash Flows

During 2006 and 2005, the Company made discretionary
contributions of $0.4 million and $11.6 million,
respectively, to its qualified defined benefit pension plans.

During 2006 and 2005, the Company made contributions of
$6.0 million and $5.8 million, respectively, to its
non-qualified defined benefit pension plans. The Company expects
to contribute $7.2 million to its non-qualified defined
benefit pension plans in 2007.

In August 2006, the Pension Protection Act of 2006 (the
Act) was enacted into law. As the provisions of the
Act include additional funding requirements for sponsors of
certain qualified defined benefit plans, the Company is
currently evaluating the impact that such provisions may have on
the timing and level of future contributions.

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.

|                                                |  |      |        |      |  |      |        |      |  |      |        |           |  |   |        |  |  |   |        |  |  |   |         | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | --------- |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                                |  |     
|                                                |  | 2007 |        | 2008 |  | 2009 |        | 2010 |  | 2011 |        | 2012-2016
|                                                |  |     
|                                               
|                                               
|                                               
|                                               
|Pension plans                                   |  | $    | 25,014 |      |  | $    | 26,518 |      |  | $    | 27,691 |           |  | $ | 29,233 |  |  | $ | 30,510 |  |  | $ | 178,274 | 
|                                               
|                                               
|                                               
|                                               
|Postretirement benefits other than
    pensions |  | $    | 6,358  |      |  | $    | 6,343  |      |  | $    | 6,654  |           |  | $ | 6,955  |  |  | $ | 7,208  |  |  | $ | 41,399  | 

Additional Information


|                                                                                                          |  |               |         |      |  |   |     | 
|--------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- |  | - | --- | 
|                                                                                                          |  | Pension Plans
|                                                                                                          |  |              
|                                                                                                          |  | 2006*         |         | 2005
|                                                                                                          |  |              
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|(Decrease) increase in minimum
    pension liability included in other comprehensive loss, net of
    tax |  | $             | (16,430 | )    |  | $ | 452 | 



|  |                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 2006 amount reflects the elimination of the additional minimum
    liability in connection with the adoption of
    SFAS No. 158, which is not a component of
    comprehensive income.

106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003






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amendments to the Companys 2006 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 $6.5 million, $6.2 million and $5.9 million
in 2006, 2005 and 2004, respectively.

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
$41.5 million in 2006, $41.3 million in 2005 and
$43.6 million in 2004.

15  INCOME TAXES

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

|          |                 |                |         |         |         |      |         |         |         |   |         |         |         | 
|--------- | --------------- | -------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|          |                 |               
|          |                 | 2006           |         | 2005    |         | 2004
|          |                 |               
|Current:  |                 |                |         |         |         |      |         |         |         |   |         |        
|         
|         
|         
|         
|          | Federal         |                | $       | 276,967 |         |      | $       | 251,001 |         |   | $       | 193,073 |        
|         
|         
|         
|         
|          | State and local |                |         | 31,015  |         |      |         | 23,181  |         |   |         | 5,698   |        
|          |                 |               
|          |                 | Total current  |         |         | 307,982 |      |         |         | 274,182 |   |         |         | 198,771 | 
|          |                 |               
|Deferred: |                 |                |         |         |         |      |         |         |         |   |         |        
|         
|         
|         
|         
|          | Federal         |                |         | (12,049 | )       |      |         | 10,618  |         |   |         | 86,686  |        
|         
|         
|         
|         
|          | State and local |                |         | (4,873  | )       |      |         | 8,549   |         |   |         | 14,081  |        
|          |                 |               
|          |                 | Total deferred |         |         | (16,922 | )    |         |         | 19,167  |   |         |         | 100,767 | 
|          |                 |               
|          |                 | $              | 291,060 |         |         | $    | 293,349 |         |         | $ | 299,538 |        
|          |                 |               












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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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

|                          |                                                                   |                                           |         |        |         |   |         |        |        | 
|------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                          |                                                                   |                                          
|                          |                                                                   | 2006                                      |         | 2005  
|                          |                                                                   |                                          
|Deferred tax assets:      |                                                                   |                                           |         |        |         |   |         |       
|                         
|                         
|                         
|                         
|                          | Postretirement benefits other than
    pensions                   |                                           | $       | 31,382 |         |   | $       | 29,378 |       
|                         
|                         
|                         
|                         
|                          | Accrued pension liabilities                                       |                                           |         | 52,240 |         |   |         | 33,324 |       
|                         
|                         
|                         
|                         
|                          | Antitrust litigation                                              |                                           |         | 5,011  |         |   |         | 5,869  |       
|                         
|                         
|                         
|                         
|                          | Other accrued liabilities                                         |                                           |         | 23,105 |         |   |         | 13,592 |       
|                         
|                         
|                         
|                         
|                          | Net operating loss, tax credit and
    capital loss carryforwards |                                           |         | 19,745 |         |   |         | 20,866 |       
|                         
|                         
|                         
|                         
|                          | All other, net                                                    |                                           |         | 786    |         |   |         | 1,394  |       
|                          |                                                                   |                                          
|                          |                                                                   |                                           | 132,269 |        |         |   | 104,423 |       
|                         
|                         
|                         
|                         
|                          | Valuation allowance                                               |                                           |         | 15,915 |         |   |         | 16,295 |       
|                          |                                                                   |                                          
|                          |                                                                   | Total deferred tax assets                 |         |        | 116,354 |   |         |        | 88,128 | 
|                          |                                                                   |                                          
|Deferred tax liabilities: |                                                                   |                                           |         |        |         |   |         |       
|                         
|                         
|                         
|                         
|                          | Depreciation                                                      |                                           |         | 67,610 |         |   |         | 69,798 |       
|                         
|                         
|                         
|                         
|                          | Prepaid pension asset                                             |                                           |         | 802    |         |   |         | 11,348 |       
|                         
|                         
|                         
|                         
|                          | Capitalized debt costs                                            |                                           |         | 74     |         |   |         | 428    |       
|                         
|                         
|                         
|                         
|                          | Inventory-related adjustments                                     |                                           |         | 10,259 |         |   |         | 6,904  |       
|                          |                                                                   |                                          
|                          |                                                                   | Total deferred tax liabilities            |         |        | 78,745  |   |         |        | 88,478 | 
|                          |                                                                   |                                          
|                          |                                                                   | Net deferred tax (assets)
    liabilities |         | ($     | 37,609  | ) |         | $      | 350    | 
|                          |                                                                   |                                          





|                                                      |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                      |  |     
|                                                      |  | 2006 |      | 2005 |  | 2004
|                                                      |  |     
|U.S. federal statutory income
    tax rate            |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|                                                     
|                                                     
|                                                     
|                                                     
|State and local taxes, net of
    federal tax benefit |  |      | 2.7  |      |  |      | 2.8  |   |  |  | 2.6  |  
|                                                     
|                                                     
|                                                     
|                                                     
|Manufacturing deduction                               |  |      | (1.0 | )    |  |      | (1.0 | ) |  |  |     |  
|                                                     
|                                                     
|                                                     
|                                                     
|Reversals of income tax accruals                      |  |      | (0.6 | )    |  |      | (2.2 | ) |  |  | (2.3 | )
|                                                     
|                                                     
|                                                     
|                                                     
|Other, net                                            |  |      | 0.6  |      |  |      | 0.8  |   |  |  | 0.5  |  
|                                                      |  |     
|                                                      |  |      | 36.7 | %    |  |      | 35.4 | % |  |  | 35.8 | %
|                                                      |  |     



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10K


The Company recorded reversals of income tax accruals of
$4.7 million, $18 million and $20 million, net of
federal income tax benefit, in 2006, 2005 and 2004, respectively.

The effective tax rate in 2006 and 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.

At December 31, 2006 and 2005, the Company has not provided
federal income taxes on earnings of approximately
$1.7 million and $21.3 million, respectively, from its
international subsidiaries. The decrease in the balance at
December 31, 2006, as compared to the prior year, was due
to the remittance of earnings to the Company in the form of
dividend payments from one of its foreign subsidiaries.

16  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,
imports 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, primarily Canada.
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
46.9 percent of annual Wine segment gross 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.

The increase in identifiable Corporate assets in 2006 was
primarily due to an increase in cash and cash equivalents and
deferred tax assets, partially offset by a reduction in other
assets. The increase in deferred tax assets and reduction in
prepaid pension costs were primarily attributable to the
adoption of SFAS No. 158 (see Note 14,
Employee Benefit and Compensation Plans). The
decrease in identifiable assets in All Other Operations in 2006
was primarily due to a decrease in cash and cash equivalents
primarily related to a cash dividend from one of the
Companys foreign subsidiaries (see Note 15,
Income Taxes). Corporate assets consist mainly of
cash and cash equivalents and short-term investments which
reflect the aforementioned increase in 2006. 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.





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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

|                                        |                    |                                                             |   |           |           |      |   |           |           |  |   |           |           | 
|--------------------------------------- | ------------------ | ----------------------------------------------------------- | - | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                                        |                    | Year Ended December 31                                     
|                                        |                    |                                                            
|                                        |                    | 2006                                                        |   | 2005      |           | 2004
|                                        |                    |                                                            
|Net Sales to Unaffiliated
    Customers |                    |                                                             |   |           |           |      |   |           |           |  |   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Smokeless Tobacco  |                                                             | $ | 1,522,686 |           |      | $ | 1,561,667 |           |  | $ | 1,575,254 |          
|                                       
|                                       
|                                       
|                                       
|                                        | Wine               |                                                             |   | 282,403   |           |      |   | 248,342   |           |  |   | 226,650   |          
|                                       
|                                       
|                                       
|                                       
|                                        | All Other          |                                                             |   | 45,822    |           |      |   | 41,876    |           |  |   | 36,334    |          
|                                        |                    |                                                            
|                                        |                    | Net sales                                                   |   | $         | 1,850,911 |      |   | $         | 1,851,885 |  |   | $         | 1,838,238 | 
|                                        |                    |                                                            
|Operating
    Profit(1)                 |                    |                                                             |   |           |           |      |   |           |           |  |   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Smokeless Tobacco  |                                                             | $ | 805,130   |           |      | $ | 852,478   |           |  | $ | 897,991   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Wine               |                                                             |   | 44,080    |           |      |   | 37,764    |           |  |   | 32,382    |          
|                                       
|                                       
|                                       
|                                       
|                                        | All Other          |                                                             |   | 15,952    |           |      |   | 14,338    |           |  |   | 10,266    |          
|                                        |                    |                                                            
|                                        |                    | Operating profit                                            |   |           | 865,162   |      |   |           | 904,580   |  |   |           | 940,639   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Corporate expenses |                                                             |   | (30,351   | )         |      |   | (26,385   | )         |  |   | (28,030   | )        
|                                       
|                                       
|                                       
|                                       
|                                        | Interest, net      |                                                             |   | (41,785   | )         |      |   | (50,578   | )         |  |   | (75,019   | )        
|                                        |                    |                                                            
|                                        |                    | Earnings from continuing
    operations before income taxes |   | $         | 793,026   |      |   | $         | 827,617   |  |   | $         | 837,590   | 
|                                        |                    |                                                            
|Identifiable Assets at
    December 31  |                    |                                                             |   |           |           |      |   |           |           |  |   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Smokeless Tobacco  |                                                             | $ | 587,490   |           |      | $ | 632,438   |           |  | $ | 631,531   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Wine               |                                                             |   | 527,310   |           |      |   | 494,320   |           |  |   | 488,904   |          
|                                       
|                                       
|                                       
|                                       
|                                        | All Other          |                                                             |   | 10,126    |           |      |   | 31,283    |           |  |   | 25,819    |          
|                                       
|                                       
|                                       
|                                       
|                                        | Corporate          |                                                             |   | 315,422   |           |      |   | 208,942   |           |  |   | 513,229   |          
|                                        |                    |                                                            
|                                        |                    | Total assets                                                |   | $         | 1,440,348 |      |   | $         | 1,366,983 |  |   | $         | 1,659,483 | 
|                                        |                    |                                                            
|Capital Expenditures                    |                    |                                                             |   |           |           |      |   |           |           |  |   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Smokeless Tobacco  |                                                             | $ | 18,456    |           |      | $ | 76,825    |           |  | $ | 60,047    |          
|                                       
|                                       
|                                       
|                                       
|                                        | Wine               |                                                             |   | 17,547    |           |      |   | 12,207    |           |  |   | 9,283     |          
|                                       
|                                       
|                                       
|                                       
|                                        | All Other          |                                                             |   | 93        |           |      |   | 193       |           |  |   | 358       |          
|                                       
|                                       
|                                       
|                                       
|                                        | Corporate          |                                                             |   | 948       |           |      |   | 722       |           |  |   | 638       |          
|                                        |                    |                                                            
|                                        |                    | Capital expenditures                                        |   | $         | 37,044    |      |   | $         | 89,947    |  |   | $         | 70,326    | 
|                                        |                    |                                                            
|Depreciation                            |                    |                                                             |   |           |           |      |   |           |           |  |   |          
|                                       
|                                       
|                                       
|                                       
|                                        | Smokeless Tobacco  |                                                             | $ | 30,005    |           |      | $ | 31,302    |           |  | $ | 31,108    |          
|                                       
|                                       
|                                       
|                                       
|                                        | Wine               |                                                             |   | 13,840    |           |      |   | 13,103    |           |  |   | 13,205    |          
|                                       
|                                       
|                                       
|                                       
|                                        | All Other          |                                                             |   | 194       |           |      |   | 175       |           |  |   | 389       |          
|                                       
|                                       
|                                       
|                                       
|                                        | Corporate          |                                                             |   | 721       |           |      |   | 761       |           |  |   | 731       |          
|                                        |                    |                                                            
|                                        |                    | Depreciation                                                |   | $         | 44,760    |      |   | $         | 45,341    |  |   | $         | 45,433    | 
|                                        |                    |                                                            



|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating profit for each reportable segment and corporate
    expenses reflects the impact of restructuring charges. See
    Note 20, Restructuring for additional
    information.



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10K


17  INTEREST, NET

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

|                                          |  |      |         |      |  |      |         |   |  |   |        |  
|----------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                          |  |     
|                                          |  | 2006 |         | 2005 |  | 2004
|                                          |  |     
|Interest expense on debt                  |  | $    | 57,484  |      |  | $    | 62,984  |   |  | $ | 83,884 |  
|                                         
|                                         
|                                         
|                                         
|Interest income from cash
    equivalents |  |      | (15,363 | )    |  |      | (10,558 | ) |  |   | (7,859 | )
|                                         
|                                         
|                                         
|                                         
|Capitalized interest                      |  |      | (336    | )    |  |      | (1,848  | ) |  |   | (1,006 | )
|                                          |  |     
|                                          |  | $    | 41,785  |      |  | $    | 50,578  |   |  | $ | 75,019 |  
|                                          |  |     





|                                    |                                                                        |                                                |   |         |         |      |   |         |         |  |   |         |         | 
|----------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |                                                                        |                                               
|                                    |                                                                        | 2006                                           |   | 2005    |         | 2004
|                                    |                                                                        |                                               
|Numerator:                          |                                                                        |                                                |   |         |         |      |   |         |         |  |   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Earnings from continuing operations                                    |                                                | $ | 501,966 |         |      | $ | 534,268 |         |  | $ | 538,052 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Income (loss) from discontinued
    operations, net                    |                                                |   | 3,890   |         |      |   |        |         |  |   | (7,215  | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings                                   |   | $       | 505,856 |      |   | $       | 534,268 |  |   | $       | 530,837 | 
|                                    |                                                                        |                                               
|Denominator:                        |                                                                        |                                                |   |         |         |      |   |         |         |  |   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Denominator for basic earnings per
    share  weighted-average shares |                                                |   | 160,772 |         |      |   | 163,949 |         |  |   | 165,164 |        
|                                   
|                                   
|                                   
|                                   
|                                    | Dilutive effect of potential common
    shares                         |                                                |   | 1,508   |         |      |   | 1,548   |         |  |   | 1,458   |        
|                                    |                                                                        |                                               
|                                    |                                                                        | Denominator for diluted earnings
    per share |   |         | 162,280 |      |   |         | 165,497 |  |   |         | 166,622 | 
|                                    |                                                                        |                                               
|Net earnings per basic
    share:   |                                                                        |                                                |   |         |         |      |   |         |         |  |   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Earnings from continuing operations                                    |                                                | $ | 3.13    |         |      | $ | 3.26    |         |  | $ | 3.26    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Income (loss) from discontinued
    operations                         |                                                |   | 0.02    |         |      |   |        |         |  |   | (0.05   | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings per basic
    share               |   | $       | 3.15    |      |   | $       | 3.26    |  |   | $       | 3.21    | 
|                                    |                                                                        |                                               
|Net earnings per diluted
    share: |                                                                        |                                                |   |         |         |      |   |         |         |  |   |        
|                                   
|                                   
|                                   
|                                   
|                                    | Earnings from continuing operations                                    |                                                | $ | 3.10    |         |      | $ | 3.23    |         |  | $ | 3.23    |        
|                                   
|                                   
|                                   
|                                   
|                                    | Income (loss) from discontinued
    operations                         |                                                |   | 0.02    |         |      |   |        |         |  |   | (0.04   | )      
|                                    |                                                                        |                                               
|                                    |                                                                        | Net earnings per diluted
    share             |   | $       | 3.12    |      |   | $       | 3.23    |  |   | $       | 3.19    | 
|                                    |                                                                        |                                               









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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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

The operating results of the cigar operation, for the year ended
December 31, 2004 were as follows:

|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|                                 
|                                 
|                                 
|                                 
|Net sales                         |  | $ | 4,215  |  
|                                  |  |   |        |  
|Loss before income taxes          |  |   | (4,899 | )
|                                 
|                                 
|                                 
|                                 
|Income tax expense                |  |   | (2,316 | )
|                                  |  |   |        |  
|Loss from discontinued operations |  | $ | (7,215 | )
|                                  |  |   |        |  







Accounting for Costs Associated with Exit or Disposal
Activities




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10K


expected to be incurred, in connection with Project Momentum for
each major type of cost associated with the initiative:

|                              |  |                       |        |                |  |   |                  | 
|----------------------------- |  | --------------------- | ------ | -------------- |  | - | ---------------- | 
|                              |  | Restructuring Charges |        |               
|                              |  | Incurred for the      |        | Total Charges 
|                              |  | Year Ended            |        | Expected to be
|                              |  | December 31, 2006     |        | Incurred(1)   
|                              |  |                      
|One-time termination benefits |  | $                     | 15,625 |                |  | $ | 16,000  $17,000 | 
|                             
|                             
|                             
|                             
|Contract termination costs    |  |                       | 390    |                |  |   | 400  500        | 
|                             
|                             
|                             
|                             
|Other restructuring costs     |  |                       | 5,982  |                |  |   | 11,000  12,000  | 
|                              |  |                       |        |                |  |   |                  | 
|Total                         |  | $                     | 21,997 |                |  | $ | 27,400  $29,500 | 
|                              |  |                       |        |                |  |   |                  | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The total cost of one-time termination benefits expected to be
    incurred under Project Momentum reflects the initiatives
    overall anticipated elimination of approximately 10 percent
    of the Companys salaried, full-time non-union positions
    across various functions and operations, primarily at the
    Companys corporate headquarters. The majority of the total
    restructuring costs expected to be incurred were recognized in
    2006, with the remainder anticipated to be recognized in 2007.
    Total restructuring charges expected to be incurred currently
    represent the Companys best estimates of the ranges of
    such charges; although there may be additional charges
    recognized as additional actions are identified and finalized.





|                                |  |                   |        |                |  |   |                  | 
|------------------------------- |  | ----------------- | ------ | -------------- |  | - | ---------------- | 
|                                |  | Restructuring     |        |               
|                                |  | Charges Incurred  |        |               
|                                |  | for the           |        | Total Charges 
|                                |  | Year Ended        |        | Expected to be
|                                |  | December 31, 2006 |        | Incurred      
|                                |  |                  
|Smokeless Tobacco               |  | $                 | 19,542 |                |  | $ | 24,800  $26,500 | 
|                               
|                               
|                               
|                               
|Wine                            |  |                   | 322    |                |  |   | 400  500        | 
|                               
|                               
|                               
|                               
|All Other Operations            |  |                   | 151    |                |  |   | 200  300        | 
|                                |  |                   |        |                |  |   |                  | 
|Total  reportable
    segments |  |                   | 20,015 |                |  | $ | 25,400  $27,300 | 
|                               
|                               
|                               
|                               
|Corporate (unallocated)         |  |                   | 1,982  |                |  |   | 2,000  2,200    | 
|                                |  |                   |        |                |  |   |                  | 
|Total                           |  | $                 | 21,997 |                |  | $ | 27,400  $29,500 | 
|                                |  |                   |        |                |  |   |                  | 



|                                       |  |             |        |             |  |               |      |       |  |   |        |   |  |   |         |  
|-------------------------------------- |  | ----------- | ------ | ----------- |  | ------------- | ---- | ----- |  | - | ------ | - |  | - | ------- | -
|                                       |  | One-Time    |        | Contract    |  | Other         |      |      
|                                       |  | Termination |        | Termination |  | Restructuring |      |      
|                                       |  | Benefits    |        | Costs       |  | Costs         |      | Total
|                                       |  |            
|Balance as of January 1, 2006          |  | $           |       |             |  | $             |     |       |  | $ |       |   |  | $ |        |  
|                                      
|                                      
|                                      
|                                      
|Add: restructuring charges incurred    |  |             | 15,625 |             |  |               | 390  |       |  |   | 5,982  |   |  |   | 21,997  |  
|                                      
|                                      
|                                      
|                                      
|Less: payments                         |  |             | (3,968 | )           |  |               | (198 | )     |  |   | (5,930 | ) |  |   | (10,096 | )
|                                      
|                                      
|                                      
|                                      
|Less: reclassified liabilities
    (1) |  |             | (7,308 | )           |  |               |     |       |  |   |       |   |  |   | (7,308  | )
|                                       |  |             |        |             |  |               |      |       |  |   |        |   |  |   |         |  
|Balance as of December 31, 2006        |  | $           | 4,349  |             |  | $             | 192  |       |  | $ | 52     |   |  | $ | 4,593   |  
|                                       |  |             |        |             |  |               |      |       |  |   |        |   |  |   |         |  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents liabilities associated with restructuring charges
    that have been recorded within other line items on the
    Consolidated Statement of Financial Position at
    December 31, 2006. The $7.3 million consists of
    $6.8 million associated with enhanced retirement benefits,
    which is reflected in the accrued liabilities for pensions and
    other postretirement benefits, (See Note 14, Employee
    Benefit and Compensation Plans) and $0.5 million
    associated with share-based compensation, which is reflected in
    additional paid-in capital.



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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

21  CONTINGENCIES

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

Smokeless Tobacco Litigation

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. The actions for three of these individuals
have been dismissed; one in September 2006 which was dismissed
without prejudice and two in October 2006 which were dismissed
with prejudice. All three remaining individuals also allege the
use of other tobacco products.

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

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

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

The Company believes, and has been so advised by counsel
handling these cases, that it has a number of meritorious
defenses to all such pending litigation. Except as to the
Companys willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such
cases are, and will continue to be, vigorously defended. The
Company believes that the ultimate outcome of such pending
litigation will not have a material adverse effect on its
consolidated financial results or its consolidated financial
position, although if plaintiffs were to prevail, the effect of
any judgment or settlement could have a material adverse



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10K


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.

Antitrust Litigation

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, Massachusetts and Wisconsin. In the first quarter
of 2006, the Company was named as a defendant in a purported
class action brought by indirect purchasers in the state of
Pennsylvania.

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, 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 has entered into a settlement with indirect
purchasers, which has been approved by the court, 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
approved Settlement, adult consumers 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, with the exception of Pennsylvania, for which the
Company believes there is insufficient basis for such a claim.
In this regard, the Company continues to make progress. On
March 8, 2006, the court entered final approval of the
settlement of the Kansas class action and New York action. An
evidentiary hearing on plaintiffs motion for an additional
amount of approximately $8.5 million in attorneys
fees, expenses and costs, plus interest, beyond the previously
agreed-upon amounts already paid by the Company was held April
4-5, 2006. To date, the court has not ruled on the motion. The
Company believes, and has been so advised by counsel handling
this case, that it has meritorious defenses in this regard, and
will continue to vigorously defend against this motion. As such,
the Company has not recognized a liability for the additional
amounts sought in this motion. The Company has had settlements
approved by the respective courts in connection with indirect
purchaser actions in approximately 80 percent of the states
in which they were filed.

The Company has been served with a purported class action
complaint filed in federal court in West Virginia attempting to
challenge certain aspects of the Settlement and seeking
additional amounts purportedly consistent with subsequent
settlements of similar actions, estimated by plaintiffs to be
between $8.9 million and $214.2 million, as well as
punitive damages and attorneys fees. The Company believes,
and has been so advised by counsel handling this case, that it
has meritorious defenses in this regard, and will continue to
vigorously defend against this complaint. As such, the Company
has not recognized a liability for the additional amounts sought
in this complaint.

The Company recorded a charge of $40 million in 2003, which
represented its best estimate of the total costs to resolve
indirect purchaser actions. The corresponding liability is
periodically reviewed and adjusted, when appropriate, for a
number of factors, including differences between actual and
estimated settlements, and changes in estimated participation
and coupon redemption rates. In 2006, the Company recorded
$2 million in pre-tax charges due to a change in the
estimated coupon redemption rate for coupons in connection with
the resolution of certain states indirect purchaser
antitrust actions and higher than anticipated administrative
expenses. 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,
2006, the liability associated with the resolution of these
indirect purchaser actions decreased



87



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UST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

to $12.9 million from $15.1 million at
December 31, 2005, primarily as a result of actual coupon
redemption and payments of administrative costs, partially
offset by the aforementioned pre-tax charges in 2006.

Each of the foregoing actions is derived from the previous
antitrust action brought against the Company by a competitor,
Conwood Company L.P. For the plaintiffs in the putative class
actions to prevail, they will have to obtain class
certification. The plaintiffs in the above actions also will
have to obtain favorable determinations on issues relating to
liability, causation and damages. The Company believes, and has
been so advised by counsel handling these cases, that it has
meritorious defenses in this regard, and they are and will
continue to be vigorously defended. The Company believes that
the ultimate outcome of these purported class actions and the
California, 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 Litigation

The Company has been named in an action in California brought by
the People of the State of California, in the name of the
Attorney General of the State of California, alleging 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 (see
Note 22, Other Matters for additional
information regarding 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, the foregoing case is, and will continue to be,
vigorously defended.

22  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. Under the Tobacco Reform
Act, the Secretary of Agriculture imposes 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 are impacted by a
number of allocation factors, as defined in the Tobacco Reform
Act. These quarterly assessments are 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 2006, 2005 and 2004, the
Company recognized charges of approximately $3.2 million,
$4.2 million and $1 million, respectively, associated
with assessments required by the Tobacco Reform Act.

In November 1998, the Company entered into 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



88



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10K


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
$16.7 million, $14.8 million and $13.2 million in
2006, 2005 and 2004, respectively.

In the first quarter of 2004, the Company paid $200 million
as part of the resolution of an antitrust action brought by a
smokeless tobacco competitor.

23  QUARTERLY FINANCIAL DATA

(Unaudited)

|                            |  |       |         |        |  |       |         |        |  |      |         |  |  |   |         |  |  |   |           | 
|--------------------------- |  | ----- | ------- | ------ |  | ----- | ------- | ------ |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                            |  |      
|                            |  | First |         | Second |  | Third |         | Fourth |  | Year
|                            |  |      
|2006                        |  |       |         |        |  |       |         |        |  |      |         |  |  |   |         |  |  |   |           | 
|                           
|                           
|                           
|                           
|Net sales                   |  | $     | 433,641 |        |  | $     | 472,900 |        |  | $    | 458,649 |  |  | $ | 485,721 |  |  | $ | 1,850,911 | 
|                           
|                           
|                           
|                           
|Gross profit                |  |       | 329,431 |        |  |       | 360,486 |        |  |      | 342,794 |  |  |   | 352,112 |  |  |   | 1,384,823 | 
|                           
|                           
|                           
|                           
|Net earnings                |  |       | 115,913 |        |  |       | 134,655 |        |  |      | 118,085 |  |  |   | 137,203 |  |  |   | 505,856   | 
|                           
|                           
|                           
|                           
|Basic earnings per share*   |  |       | 0.72    |        |  |       | 0.84    |        |  |      | 0.74    |  |  |   | 0.86    |  |  |   | 3.15      | 
|                           
|                           
|                           
|                           
|Diluted earnings per share* |  |       | 0.71    |        |  |       | 0.83    |        |  |      | 0.73    |  |  |   | 0.85    |  |  |   | 3.12      | 
|                           
|                           
|                           
|                           
|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*   |  |       | 0.74    |        |  |       | 0.83    |        |  |      | 0.81    |  |  |   | 0.88    |  |  |   | 3.26      | 
|                           
|                           
|                           
|                           
|Diluted earnings per share* |  |       | 0.73    |        |  |       | 0.82    |        |  |      | 0.80    |  |  |   | 0.88    |  |  |   | 3.23      | 



|  |                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Quarterly earnings per share amounts are based on average shares
    outstanding during each quarter and, therefore, may not equal
    the total calculated for the full year.














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

Not applicable.





Item 9A  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Report of Management on Internal Control over Financial
Reporting

The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f)
and 15d-15(f). Under
the supervision and with the participation of management,
including the Companys Chief Executive Officer and Chief
Financial Officer, the Company conducted an evaluation of the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006 based on the
framework in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, management
concluded that the Companys internal control over
financial reporting was effective as of December 31, 2006.

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, 2006 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.

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, 2006 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, Executive Officers and
Corporate Governance

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 2007 Annual Meeting and Proxy
Statement.

The Company hereby incorporates by reference the information
with respect to the names, ages and business experience 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 2007 Annual Meeting and Proxy
Statement.



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10K


Executive Officers of the Registrant

The name, current position with the Company, age and business
experience of each executive officer of the Company as of
January 31, 2007 is set forth below:

|                       |  |                                                       |  |     |    | 
|---------------------- |  | ----------------------------------------------------- |  | --- | -- | 
|Name                   |  | Current Position                                      |  | Age
|                      
|                      
|                      
|                      
|Murray S. Kessler      |  | President and Chief Executive
    Officer             |  |     | 47 | 
|                      
|                      
|                      
|                      
|Robert T. DAlessandro |  | Senior Vice President and Chief
    Financial Officer |  |     | 53 | 
|                      
|                      
|                      
|                      
|Richard A. Kohlberger  |  | Senior Vice President, General
    Counsel and Chief  |  |     | 61 | 
|                       |  | Administrative Officer                                |  |     |    | 
|                      
|                      
|                      
|                      
|Theodor P. Baseler     |  | President  International
    Wine & Spirits Ltd.     |  |     | 52 | 
|                      
|                      
|                      
|                      
|Daniel W. Butler       |  | President 
    U.S. Smokeless Tobacco Company        |  |     | 47 | 















Code of Ethics


8-K.




91







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##### Table of Contents

Company has also adopted a Directors Code of
Responsibility and a Code of Corporate Responsibility applicable
to all employees. These codes are also posted on the
Companys website and are similarly available from the
Company.

Director Nomination Procedures

The Company hereby incorporates by reference the information
with respect to director nomination procedures which is
contained under the caption Director Nomination
Procedures in its Notice of 2007 Annual Meeting and Proxy
Statement.

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
2007 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 Executive Compensation, and the
information with respect to Compensation Committee interlocks
and insider participation which is contained under the caption
Committees of the Board. The information contained
under the caption Compensation Committee Report in
its Notice of 2007 Annual Meeting and Proxy Statement is
incorporated herein by reference in response to this Item.





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
2007 Annual Meeting and Proxy Statement.

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 2007 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,
2006. 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)(3)       |  | (c)             
|                                                                      |  |                  |           |              |  |                 
|Equity compensation plans approved
    by security holders            |  |                  | 5,730,732 | (1)          |  | $                | 34.43 |  |  |  | 9,250,464 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Equity compensation plans not
    approved by security
    holders(2) |  |                  | 9,610     |              |  | $                | 43.40 |  |  |  |          | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Total                                                                 |  |                  | 5,740,342 |              |  | $                | 34.45 |  |  |  | 9,250,464 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of 250,000 shares issuable upon exercise of
    outstanding stock options, 301,522 shares issuable upon
    vesting of outstanding restricted stock, 202,150 shares
    issuable upon conversion of outstanding restricted stock units
    and 23,727 shares issuable upon conversion of outstanding
    deferred stock under the UST Inc. 2005 Long-Term Incentive Plan
    (2005 LTIP). In addition, 1,542,900 shares
    issuable upon exercise of outstanding stock options,
    261,013 shares issuable upon vesting of outstanding
    restricted



92







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10K


stock and 28,325 shares
    issuable upon conversion of outstanding restricted stock units
    under the UST Inc. Amended and Restated Stock Incentive Plan
    (formerly the UST Inc. 2001 Stock Option Plan) are included in
    the above total. Also included in the total are
    3,075,100 shares and 45,995 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)
    Represents the weighted-average
    grant date fair value of restricted stock and restricted stock
    units and the weighted-average exercise price of options
    outstanding at December 31, 2006.



Item 13  Certain Relationships and Related
Transactions, and Director Independence

The Company hereby incorporates by reference information with
respect to indebtedness of management which is contained in the
table and the accompanying text set forth under the caption
Indebtedness of Management, and with respect to the
Companys policies and procedures for the review and
approval of transactions in which a related party is known to
have a direct or indirect interest, the information under the
caption Policy Governing Related Party Transactions
in its Notice of 2007 Annual Meeting and Proxy Statement.

In addition, the Company hereby incorporates by reference
information with respect to the independence of directors which
is contained under the caption Director Independence
in its Notice of 2007 Annual Meeting and Proxy Statement.





Item 14  Principal Accountant Fees and
Services

The Company hereby incorporates by reference the information
required herein which is contained under the captions entitled
Audit and Non-Audit Fees and Audit Committee
Pre-Approval Policies and Procedures in its Notice of 2007
Annual Meeting and Proxy Statement.





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PART IV







Item 15  Exhibits and Financial Statement
Schedules

Documents filed as part of this Report:

UST Inc. Schedule II  Valuation and Qualifying
Accounts For the Years 2006, 2005 and 2004 
 (Dollars in thousands)

|                              |                                    |            |   |           |  |            |   |        |  |  |   |         |  |  |   |       | 
|----------------------------- | ---------------------------------- | ---------- | - | --------- |  | ---------- | - | ------ |  |  | - | ------- |  |  | - | ----- | 
|                              |                                    |           
|                              |                                    | Balance at |   |           |  | Balance at
|                              |                                    | Beginning  |   |           |  | End of    
|                              |                                    | of Period  |   | Additions |  | Deductions |   | Period
|                              |                                    |           
|                             
|                             
|                             
|                             
|Year ended December 31, 2006: |                                    |            |   |           |  |            |   |        |  |  |   |         |  |  |   |      
|                             
|                             
|                             
|                             
|                              | Deducted from accounts receivable: |            |   |           |  |            |   |        |  |  |   |         |  |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Allowance for doubtful accounts    |            | $ | 79        |  |            | $ | 26     |  |  | $ | (6)     |  |  | $ | 99    | 
|                             
|                             
|                             
|                             
|                              | Deducted from inventories:         |            |   |           |  |            |   |        |  |  |   |         |  |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Reserve for inventory obsolescence |            |   | 2,995     |  |            |   | 2,053  |  |  |   | (2,318) |  |  |   | 2,730 | 
|                             
|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 | 



S-K:


10-Q


8-K


10-Q


S-4


S-4


S-4




94







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10K


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.



95



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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*  Amendment to the UST Inc. Long-Term Incentive
Plan, dated December 7, 2006.

10.27*  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.

10.28*  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.

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

10.30*  UST Inc. Director Deferral Program,
incorporated by reference to Exhibit 10.1 to
Form 8-K filed
April 10, 2006.

10.31*  Severance Agreement, dated June 23,
2006, by and between UST Inc. and Robert T. DAlessandro,
incorporated by reference to Exhibit 10.1 to
Form 8-K filed
June 27, 2006.

10.32*  Severance Agreement, dated June 23,
2006, by and among UST Inc., U.S. Smokeless Tobacco Company
and Daniel W. Butler, incorporated by reference to
Exhibit 10.2 to
Form 8-K filed
June 27, 2006.

10.33*  Severance Agreement, dated June 23,
2006, by and among UST Inc., International Wine &
Spirits Ltd. and Theodor P. Baseler, incorporated by reference
to Exhibit 10.3 to
Form 8-K filed
June 27, 2006.

10.34*  Employment Agreement, dated December 7,
2006, by and between UST Inc. and Murray S. Kessler,
incorporated by reference to Exhibit 10.1 to
Form 8-K filed
December 11, 2006.

10.35*  Form of Notice of Grant and Restricted Stock
Agreement between the Company and Daniel W. Butler, incorporated
by reference to Exhibit 10.2 to
Form 8-K filed
December 11, 2006.

10.36  Purchase and Sale Agreement, by and between
UST Inc. and Antares 100WP LLC, incorporated by reference to
Exhibit 10.1 to
Form 8-K filed
February 2, 2007.



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##### Table of Contents

10K


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(b) of the
    rules governing the preparation of this Report.



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##### Table of Contents

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 23, 2007 |  |          |  |                                                                                             
|                        |  | By:      |  | /s/
    MURRAY S. KESSLERMurray
    S. Kessler
    President and
    Chief Executive Officer



|                  |  |                                                                                         |  |                                                             
|----------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------
|February 23, 2007 |  | Director, Chairman of the Board                                                         |  | /s/
    VINCENT A. GIERER, JR.Vincent
    A. Gierer, Jr.    
|February 23, 2007 |  | Director, President and
    Chief Executive Officer
    (Principal Executive Officer)   |  | /s/
    MURRAY S. KESSLERMurray
    S. Kessler              
|                 
|February 23, 2007 |  | Senior Vice President
    and Chief Financial Officer
    (Principal Financial Officer) |  | /s/
    ROBERT T.
    DALESSANDRORobert
    T. DAlessandro
|                 
|February 23, 2007 |  | Vice President and Controller
    (Principal Accounting Officer)                        |  | /s/
    JAMES D. PATRACUOLLAJames
    D. Patracuolla        
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    JOHN D. BARRJohn
    D. Barr                        
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    JOHN P. CLANCEYJohn
    P. Clancey                  
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    PATRICIA DIAZ DENNISPatricia
    Diaz Dennis        
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    JOSEPH E. HEIDJoseph
    E. Heid                    
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    PATRICK J. MANNELLYPatrick
    J. Mannelly          
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    PETER J. NEFFPeter
    J. Neff                      
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    ANDREW J. PARSONSAndrew
    J. Parsons              
|                 
|February 23, 2007 |  | Director                                                                                |  | /s/
    RONALD J. ROSSIRonald
    J. Rossi                  






98