Notes to Consolidated Financial Statements

Note 1. Group, Inc. options held by such person on the PMI Distribution Date; and Background and Basis of Presentation:≥ I an adjusted Altria Group, Inc. option for the same I Background: At December 31, 2008, Altria Group, Inc.’s number of shares of Altria Group, Inc. common stock wholly-owned subsidiaries included Philip Morris USA Inc. with a reduced exercise price. (“PM USA”), which is engaged in the manufacture and sale of As set forth in the Employee Matters Agreement, the cigarettes and other tobacco products in the United States, exercise price of each option was developed to reflect the rel- and John Middleton Co. (“Middleton”), which is engaged in ative market values of PMI and Altria Group, Inc. shares, by the manufacture and sale of machine-made large cigars and allocating the share price of Altria Group, Inc. common stock pipe tobacco. Philip Morris Capital Corporation (“PMCC”), before the spin-off ($73.83) to PMI shares ($51.44) and Altria another wholly-owned subsidiary, maintains a portfolio of Group, Inc. shares ($22.39) and then multiplying each of leveraged and direct finance leases. In addition, Altria Group, these allocated values by the Option Conversion Ratio. The Inc. held a 28.5% economic and voting interest in SABMiller Option Conversion Ratio was equal to the exercise price of plc (“SABMiller”) at December 31, 2008. Altria Group, Inc.’s the Altria Group, Inc. option, prior to any adjustment for the access to the operating cash flows of its subsidiaries consists spin-off, divided by the share price of Altria Group, Inc. com- principally of cash received from the payment of dividends mon stock before the spin-off ($73.83). by its subsidiaries. Holders of Altria Group, Inc. restricted stock or deferred UST Acquisition: As further discussed in Note 23. Subsequent stock awarded prior to January 30, 2008, retained their Events, on January 6, 2009, Altria Group, Inc. acquired all of existing awards and received the same number of shares of the outstanding common stock of UST Inc. (“UST”), which restricted or deferred stock of PMI. The restricted stock and owns operating companies engaged in the manufacture and deferred stock will not vest until the completion of the origi- sale of moist smokeless tobacco products and wine. As a nal restriction period (typically, three years from the date of result of the acquisition, UST has become an indirect wholly- the original grant). Recipients of Altria Group, Inc. deferred owned subsidiary of Altria Group, Inc. stock awarded on January 30, 2008, who were employed by Altria Group, Inc. after the PMI Distribution Date, received On March 28, 2008 (the “PMI Distribution PMI Spin-Off: additional shares of deferred stock of Altria Group, Inc. to Date”), Altria Group, Inc. distributed all of its interest in Philip preserve the intrinsic value of the award. Recipients of Altria Morris International Inc. (“PMI”) to Altria Group, Inc. stock- Group, Inc. deferred stock awarded on January 30, 2008, holders of record as of the close of business on March 19, who were employed by PMI after the PMI Distribution Date, 2008 (the “PMI Record Date”), in a tax-free distribution. Altria received substitute shares of deferred stock of PMI to pre- Group, Inc. distributed one share of PMI common stock for serve the intrinsic value of the award. every share of Altria Group, Inc. common stock outstanding To the extent that employees of the remaining Altria as of the PMI Record Date. Following the PMI Distribution Group, Inc. received PMI stock options, Altria Group, Inc. reim- Date, Altria Group, Inc. does not own any shares of PMI stock. bursed PMI in cash for the Black-Scholes fair value of the Altria Group, Inc. has reflected the results of PMI prior to the stock options received. To the extent that PMI employees held PMI Distribution Date as discontinued operations on the con- Altria Group, Inc. stock options, PMI reimbursed Altria Group, solidated statements of earnings and the consolidated state- Inc. in cash for the Black-Scholes fair value of the stock ments of cash flows for all periods presented. The assets and options. To the extent that employees of Altria Group, Inc. liabilities related to PMI were reclassified and reflected as received PMI deferred stock, Altria Group, Inc. paid to PMI the discontinued operations on the consolidated balance sheet fair value of the PMI deferred stock less the value of projected at December 31, 2007. The distribution resulted in a net forfeitures. To the extent that PMI employees held Altria decrease to Altria Group, Inc.’s stockholders’ equity of Group, Inc. restricted stock or deferred stock, PMI reim- $14.4 billion on the PMI Distribution Date. bursed Altria Group, Inc. in cash for the fair value of the Holders of Altria Group, Inc. stock options were treated restricted or deferred stock less the value of projected forfei- similarly to public stockholders and, accordingly, had their tures and any amounts previously charged to PMI for the stock awards split into two instruments. Holders of Altria restricted or deferred stock. Based upon the number of Altria Group, Inc. stock options received the following stock Group, Inc. stock awards outstanding at the PMI Distribution options, which, immediately after the spin-off, had an aggre- Date, the net amount of these reimbursements resulted gate intrinsic value equal to the intrinsic value of the pre-spin in a payment of $449 million from Altria Group, Inc. to PMI. Altria Group, Inc. options: The reimbursement to PMI is reflected as a decrease to

I a new PMI option to acquire the same number of the additional paid-in capital of Altria Group, Inc. on the shares of PMI common stock as the number of Altria December 31, 2008 consolidated balance sheet.